S&P Global Ratings recently made headlines when they decided to trim Israel’s credit ratings amidst the country’s ongoing tussle with Hamas and its recent clash with Iran. The long-term foreign and local currency sovereign credit ratings were downgraded from ‘AA-‘ to ‘A+’, with the short-term ratings also taking a hit from ‘A-1+’ to ‘A-1′. Additionally, a negative outlook has been cast on the long-term ratings, signaling potential rocky terrain ahead for the nation. The decision was influenced by what S&P Global deemed as a spike in already high geopolitical risks faced by Israel following a direct attack by Iran in mid-April 2024.
The unfolding scenario projects a continued Israel-Hamas conflict in 2024, with a gradual easing of intensity over time. While skirmishes between Hezbollah and Israel are expected to persist at the northern Lebanese border, the likelihood of a full-blown escalation appears subdued. However, looming in the backdrop are various military escalation risks, notably a more pronounced and enduring confrontation with Iran. The delicate balance of international pressure on Israel to temper its response to Iran’s aggression against the latter’s communicated intent not to escalate heightens the potential for missteps or accidents, keeping tensions on a knife’s edge.
The specter of intensified conflict looms large, with the situation between Israel and Iran-backed Hezbollah posing a particular concern. Any uptick in Hezbollah’s assaults on Israel or Israeli moves in Lebanon to create a buffer zone could ignite a fresh wave of hostilities. S&P highlighted Israel’s recent economic downturn, marked by a 5.7% quarterly contraction following Hamas’ assault, as a notable repercussion of the ongoing confrontations. The assessment underscored the risks of a further ratings downgrade should the conflicts expand and adversely impact Israel’s economic landscape, fiscal health, and balance of payments in a more substantial manner than currently envisioned.
Despite the cautionary stance, S&P Global Ratings doesn’t envision a prolonged standoff between Israel and Iran, emphasizing the potential for de-escalation. However, the specter of a looming rating cut remains if the conflicts drag on or if their economic fallout surpasses current projections. The delicate dance of geopolitics continues to unfold in the region, with Israel navigating a complex web of challenges on multiple fronts. As the spotlight remains firmly trained on Israel’s next moves and the evolving dynamics in the Middle East, the stakes are high, and the path forward remains fraught with uncertainty.
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