The international Fitch ratings firm has downgraded Israel’s credit rating from A+ to A, the company announced Monday, adding the outlook is “negative.”
An “A” rating is still considered investment grade, or among the safer groups of debt issuers. Moody’s rating company downgraded Israel’s rating in February from A1 to A2, which is still in the investment grade category.
“The downgrade to ‘A’ reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts,” the company said.
Large outlays for military operations, mitigation of economic damage and relocation expenses for those evacuated from their homes in the north accounted for much of the rise, the company said.
“Public finances have been hit and we project a budget deficit of 7.8 percent of GDP in 2024 and debt to remain above 70 percent of GDP in the medium term. In addition, World Bank Governance Indicators are likely to deteriorate, weighing on Israel’s credit profile.”
In response to the news, Prime Minister Benjamin Netanyahu issued a brief statement saying the Israeli economy is “strong and is functioning well.
“The lowering of the rating is a result of Israel having to cope with a multi-front war that was forced on it. The rating will be raised again when we win — and we will win.”
Finance Minister Bezalel Smotrich did not deny the company’s findings but noted the current existential war for Israel’s survival is necessary, albeit expensive.
“The State of Israel is in the midst of an existential war, the longest and most expensive in its history. A war that is being waged on several fronts at the same time and has been going on for almost a year.
“The downgrade comes in the wake of the war and the geopolitical risks it creates, but Israel’s economy is strong, and we are managing it correctly and responsibly,” Smotrich said.
“With God’s help, we will win the war, restore security, and raise the economy from war to a path of growth. We will pass a responsible budget that will continue to support all the needs of the war on the front and in the rear until victory, while maintaining fiscal frameworks and promoting growth engines. Very soon, the credit rating will also rise again. ”
Fitch forecast that the war will likely continue until end-2024 and could even last “well into 2025” with a risk of intense operations and expansion to additional fronts continuing beyond.
“This implies continued high spending on immediate military needs, and disruptions to production in the border areas and in tourism and construction . . . In addition to human losses, it could result in significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment, leading to a further deterioration of Israel’s credit metrics,” the company said.
“We project a budget deficit of 4.6 percent of GDP in 2025 on lower military spending and revenue growth, although it could be wider if the war continues in 2025. Moreover, we expect the government will permanently increase military spending by close to 1.5 percent of GDP versus pre-war levels. Israel is likely to maintain a stronger presence along its borders than in the past, plans to widen mandatory draft and to increase domestic military production, which would also add to spending.” Israel’s government budget deficit in 2023 stood at 4.1 percent.
“We forecast current account surpluses at 4.3 percent of GDP in 2024 and 3.9 percent in 2025, versus 4.8 percent in 2023,” Fitch predicted.
But the news was not all bad: Fitch noted that Israel has demobilized most of its reservists, reducing the war’s impact on the workforce.
“Revenue collection rebounded in 1H24 to a level above the amended budget and we expect it to remain strong during the rest of the year,” Fitch added.
Furthermore, the company said Israel’s external balance sheet remains stronger than those of its peers “despite the shocks,” with a net external creditor position of 64.2 percent of GDP at end-2023 (from 51.6 percent in 2022) compared with 5.1 percent for the peer median.
The Bank of Israel’s foreign exchange reserves increased to USD 213.4 billion in July 2024, from USD 204.7 billion at end-2023, Fitch noted.
