S&P lowers Israel's outlook to negative amid geopolitical risks

By Ovunc Kutlu

ISTANBUL (AA) - S&P Global revised down Israel's outlook to negative from stable amid geopolitical risks, but affirmed its ratings at AA- level.

"Our baseline scenario assumes that the Israel-Hamas war will remain centered in Gaza, but there are risks that it could spread more widely with a more pronounced impact on the economy and security situation in Israel," it said in a statement late Tuesday.

"The negative outlook reflects the risk that the Israel-Hamas war could spread more widely or affect Israel's credit metrics more negatively than we expect. We currently assume the conflict will remain centered in Gaza and last no more than three to six months," it added.

The global rating agency said it now expects Israel's economy to contract by 5% in the fourth quarter of this year, compared to the third quarter, before rebounding early next year.

"The contraction will stem from security-related disruptions and reduced business activity; the drafting of a large number of reservists; the foreign tourism sector shutdown; and a broader confidence shock," it added.

The agency said the rise in Israel's defense spending is expected to increase its average general government deficit to 5.3% of GDP in 2023-2024, up from the previous forecast of 2.3%.

S&P warned that Israel's ratings could be lowered if the conflict widens materially, increasing the security and geopolitical risks that Israel faces, also if the impact of the conflict on Israel's economic growth, fiscal position and balance of payments becomes more significant than expected.