According to a new report by ratings agency S&P released this week, Israel will see its economy contract by 5% in the fourth quarter of this year, as the conflict with Hamas causes geopolitical tensions to rise for the Jewish state and security risks multiply due to the conflict.

S&P pointed to reduced business activity during the conflict, flagging consumer demand, and an investment environment it characterized as “very uncertain.”

Before the war, the ratings agency forecast that Israel would have a 2.3% fiscal deficit in 2023 and 2024, however since the outbreak of the conflict, it is now forecasting there will be a fiscal deficit of 5.3% of GDP for the period.

Much of the deficit will come from the fact that the government of Israel has sharply increased expenditures on the military conflict, and is compensating businesses which lie near the Gaza border, as well as families of those Israelis take hostage by Hamas. As a result of these expenditures, the budget deficit has exploded, reaching more than $6 billion last month, which is an increase of more than seven-fold compared to a year prior.

S&P issued the report after it had downgraded the Jewish state’s credit outlook last month from “stable” to “negative,” only two weeks after the start of the conflict with Hamas on October 7th. Both Moody’s and Fitch have also put Israel on a review for downgrading.

S&P has noted that if the conflict resolves, it believes it would quickly restore Israel’s credit outlook, as a resolution to the conflict would immediately remove all regional and security risks the nation is facing as a result of the crisis.