credit rating agency S&P Issues Dire Economic Forecast for Israel Amid Iron Swords War Fallout

In a somber announcement, global credit rating agency Standard & Poor's (S&P) has projected a grim economic outlook for Israel against the backdrop of the ongoing Iron Swords War. While not issuing an immediate rating action, S&P warns of a significant downturn, predicting a negative growth of 5% in the Israeli GDP for the last quarter of 2023.

The agency forecasts a troubling government deficit, projecting an accumulation exceeding 10% over the next two years. This translates to an average deficit of 5.3% of GDP in both 2023 and 2024. The growth forecast for the next two years remains meager at 1.5% in 2023 and a mere 0.5% in 2024, reflecting negative growth per capita for both years.

In a particularly alarming prediction, S&P anticipates a 15% decline in GDP per capita denominated in dollars by the end of 2024, plummeting from $55,000 at the close of 2022 to approximately $46,000. This unsettling forecast underscores the economic challenges Israel faces in the aftermath of the Iron Swords War.

The debt burden is expected to surge, with the GDP debt ratio projected to exceed 67% compared to the current 60%. S&P anticipates that the elevated debt levels will persist until 2026, reaching 64% of GDP.

Last month, S&P downgraded Israel's rating outlook from positive to negative, signaling a potential downgrade in the medium term. Israel's current rating (AA-) had been higher than its competitors (A+), who had already placed the country on a watchlist the previous week. Notably, Israeli government bond yields now trade at levels comparable to those of countries with a BBB rating.

While emphasizing that this report does not initiate any immediate actions, it is evident that S&P seeks to expand upon its limited analysis issued on October 26. S&P acknowledges the potential for a gradual economic recovery in the next year, with pre-war GDP levels expected to be reached by the end of 2024. However, the contraction in economic activity is attributed to lower business activity, reduced consumer demand, and an investment environment riddled with uncertainty. S&P underscores that while expenses and supports directly linked to the war are anticipated to decrease, defense expenditures are likely to remain high in the medium term.