Rating agency S&P Global has issued an unusual statement highlighting the increased risk posed by the escalating conflict in the Middle East. The agency warns that the potential for regional escalation presents a significant threat to Israel's security, economy, and social stability.
"Our baseline rating scenario for Israel assumes that a wider regional war will be avoided, but the risks of escalation are increasing following the assassinations of senior Hezbollah and Hamas officials in Beirut and Tehran this week," S&P stated.
Economic and Security Concerns
S&P noted the difficulty in quantifying the precise impact of a potential wider conflict on Israel's economic performance, fiscal stability, and balance of payments. The agency anticipates that the effects could manifest in various forms, including the mobilization of additional reserves, security-related disruptions, and increased budgetary expenditures.
"The geopolitical and security risks remain very high for Israel following the assassinations and Iran's reported intention to retaliate, although the timing and extent of such retaliation remain unclear," S&P explained. In April 2024, Iran conducted its first direct attack on Israel, launching hundreds of missiles and drones. Although the damage was contained, the incident did not escalate into a broader conflict.
Potential Scenarios for Conflict Escalation
S&P outlines two primary scenarios for potential conflict expansion:
- Significant Conflict with Hezbollah: This scenario could involve widespread attacks by Hezbollah or a military operation by Israel in Lebanon aimed at pushing Hezbollah away from the Lebanese border. This is considered the "easier" scenario.
- Continuous Direct Confrontation with Iran: This scenario involves a broader and ongoing direct confrontation with Iran. S&P emphasizes the risk of miscalculations or unintended escalations even if Israel, Iran, and Hezbollah do not intend to escalate the conflict.
The agency's economists stress that these potential escalation scenarios are not part of their baseline rating scenario for Israel. However, they acknowledge that if these scenarios materialize, they could pose an additional rating risk, already reflected in the current negative outlook on Israel's long-term A+ rating. In their last rating announcement, the escalation scenario was the main reason for downgrading the rating and issuing a negative forecast.
"Further worsening of the ongoing conflicts for Israel and its effects—mobilization of reserves, further displacement of residents, and disruption of the education system—could weigh more heavily on consumer and business sentiment, output and investments, as well as on the fiscal aspect," S&P concludes. The agency underscores that the current situation's impact is challenging to estimate accurately.
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