S&P Says Israel's Credit Rating Stalled by Gaza War, Could Face Downgrade if Conflict Escalates to Iran

Israel’s sovereign credit rating is unlikely to see an upgrade until the ongoing conflict in Gaza reaches a conclusion, according to Maxim Rybnikov, Director at S&P Global Ratings. Speaking at the Israel Democracy Institute’s annual economic conference on Tuesday, Rybnikov emphasized that the war, which erupted in October 2023 and has extended beyond original expectations, continues to weigh heavily on Israel’s economy and its fiscal trajectory.

“For the outlook side, it’s all about security risks and how this is going to unfold,” Rybnikov said, adding that the continuation of military operations is the central factor shaping S&P’s current stance on Israel. The agency earlier this month reaffirmed Israel’s long- and short-term foreign and local currency credit ratings at “A/A-1” while maintaining a “negative” outlook, citing persistent instability in the region.

According to Rybnikov, any significant escalation of the conflict, especially involving direct confrontation with Iran, would trigger a downgrade. “The key downside triggers are, first of all, military conflicts hampering some of Israel’s characteristics, such as economic growth, fiscal position and balance of payments more than we currently anticipate,” he stated. However, he clarified that a broader war with Iran is not the baseline scenario currently envisioned by S&P.

Looking forward, Rybnikov projected sustained pressure on Israel’s fiscal position, even in the medium term, due to elevated defence spending. He noted that Israel’s budget deficit is expected to rise to 5 per cent of GDP in 2027 and slightly decrease to 4.2 per cent by 2028. “We don’t know … the way forward and how the war is going to end, and for us, it certainly presents risks, especially in a scenario where there’s a more significant escalation,” he remarked.

Despite the uncertainties, Rybnikov left room for potential improvement in Israel’s rating outlook if the security environment stabilizes. “We still expect some stabilisation to happen over the medium term. What forms and how quickly it will take is still uncertain,” he said. A shift back to a “stable” outlook could be considered if the threat of military escalation diminishes and broader security risks ease.

On the global front, Rybnikov also addressed wider economic dynamics, pointing to a “seismic shift” in U.S. trade policy. S&P now assumes a scenario in which the U.S. imposes 25 per cent tariffs on select goods including water, steel, semiconductors, and aluminum, alongside a general 10 per cent tariff across the board. Despite these trade adjustments and slowdowns in both U.S. and Chinese economies, Rybnikov does not foresee a recession in the United States.

“The numbers … are very uncertain and there (are) significant downside risks,” he warned, indicating that while economic growth may soften, a full-blown contraction is not currently projected in the global outlook.

By fLEXI tEAM