S&P: Economic Impact of Southern Conflict Prompts Credit Rating Warning for Israel

The financial ramifications are becoming increasingly apparent. Tonight, the S&P agency announced a significant change in its credit rating forecast for Israel, downgrading it from "stable" to "negative." This decision signals a potential medium-term credit rating reduction for the nation.

Currently, Israel holds an S&P credit rating of (AA-), which is higher than the ratings assigned by its competitors Fitch and Moody's, who had recently placed Israel on their watch list, indicating a consideration of adjusting their forecasts.

The impact of the conflict is being deeply felt in the financial markets, as Israel's government bond yields have been trading at levels similar to countries with a BBB rating. Furthermore, insurance certificates for Israel's bankruptcy, the 5-year CDS, have seen a significant surge of 136% in the past 10 days.

Moody's, another prominent credit rating agency, had even postponed the publication of its rating report on Israel by six months, explaining that they are continuing to assess the conflict's impact on the nation's credit rating. However, no changes have been made at this stage.

A Moody's executive stated, "The renewed conflict continues to take a heavy human toll. Moody's will continue to assess the broader credit risk of the recent hostilities and will update the market with our views accordingly. We continue to assess the impact of the situation on the credit rating and have not made any changes to it at this stage."

The economic consequences of the conflict are dramatic, with significant portions of the economy severely affected. The Ministry of Finance, albeit somewhat delayed in its response, now comprehends the magnitude of the situation. Finance Minister Bezalel Smotrich has pledged to present a detailed plan to assist businesses within the next two days.

The required aid extends beyond businesses located in the immediate vicinity of Gaza, as enterprises across the country are suffering from reduced activity due to Home Front Command restrictions, employee conscription, and declining demand in various sectors, including retail, culture, leisure, and tourism.

In initial steps to address these challenges, the Ministry of Finance announced that social security payments for self-employed individuals in the south and reservists will be deferred. VAT payments will also be postponed. The state will accelerate payments to suppliers, extend licenses, and defer toll payments.

In addition to compensation for direct damage, businesses affected by the conflict will be eligible for grants covering indirect damage, such as inventory losses, and a business continuity grant to help cover fixed expenses. Nevertheless, these measures may not be sufficient to sustain all businesses, especially smaller and independent ones, during this difficult period.

A more comprehensive plan is currently under development at the Ministry of Finance, with details expected to be unveiled in the coming days. This forthcoming plan is anticipated to resemble the business aid package deployed during the COVID-19 pandemic, wherein numerous businesses received financial support and concessions due to prolonged closures.

The ongoing conflict in southern Israel is clearly having a significant impact on the nation's economic stability, prompting the government to take substantial measures to support affected businesses and industries.