Fitch Ratings has removed Israel from Rating Watch Negative (RWN), and affirmed the Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A+’ with a Negative Outlook.
In contrast, Moody’s downgraded Israel’s credit rating to A2 this past February, a rating that is still five notches above investment grade, but kept the nation’s credit outlook at “negative”, meaning a further downgrade is possible.
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The global credit rating agency cited material political and fiscal risks for the country from its war with Gaza’s Iranian-backed Hamas terrorist organization, and said the impact of the conflict raises political risk and weakens Israel’s executive and legislative institutions, and its fiscal strength for the foreseeable future.
Not so with Fitch Ratings, however.
“Geopolitical risks associated with the war in Gaza remain elevated and escalation risks remain present, but Fitch believes the risks to the credit profile have broadened and their impact may take longer to assess, so has removed the RWN on Israel’s ‘A+’ rating,” the ratings agency said.
“The Negative Outlook reflects the combination of uncertainties around the fiscal trajectory and the war’s duration and intensity, including the risk of regional escalation,” the agency explained. “We expect a near-term jump in debt/GDP and persistently higher military spending in the context of fractious domestic politics and uncertain macroeconomic prospects, which could limit Israel’s ability to bring down debt in the future.”
The agency noted that the risks of a widening of Israel’s current conflict that could include large-scale military confrontations with multiple actors such as Hezbollah, other regional Iranian proxies and Iran itself, remain high.
“This is not our base case, but such large-scale escalation, in addition to human loss, could result in significant additional military spending, destruction of infrastructure, sustained change in consumer and investment sentiment, and thus lead to a large deterioration of Israel’s credit metrics,” the agency cautioned.
Continued military operations in Gaza also contribute to the continued risk of a widening of the conflict at an elevated level, according to Fitch.
“The war and associated economic disruptions contributed to a 6.6 percent drop in revenue in 2023, while a 12.5 percent rise in spending was driven by mitigation measures for those affected and military spending.
“The budget deficit reached 4.1 percent of GDP versus the initial government budget of 0.9 percent. The Knesset passed a revised budget for 2024 which includes about 3.6 percent of GDP in new spending, largely related to the war, and about 0.9 percent of GDP in new revenue and spending cuts (0.3 percent of GDP in permanent measures).”
The agency said it forecasts a budget deficit of 6.8 percent, slightly above the budget’s forecast.
“In 2025, we project a central government budget deficit of 3.9 percent, reflecting our expectation that war-related military spending will be phased out but permanent military spending will remain about 0.8 percent of GDP higher than in the 2023 budget.
The surge in debt will also reduce fiscal space with higher interest costs. The authorities have announced a target of 3.5 percent for the budget deficit and the Knesset has adopted several permanent and temporary measures that it estimates could reduce the deficit by 1.1 percent of GDP if implemented,” Fitch noted.
The agency projected the debt-to-GDP to rise to 65.7 percent in 2024 and 67 percent in 2025, below the 2021 level of 68 percent. “However, the combination of higher permanent military spending and uncertain macroeconomic trends could mean that debt will remain on an upward trend beyond 2025.
“Israel’s debt is higher than the forecast ‘A’ peer median of 55 percent for 2025, while it has retained its ability to access international funding through the conflict,” the agency added.
