Fitch Ratings announced last night that it has downgraded Israel’s credit rating from A+ to A with a negative outlook. Fitch’s downgrade of Israel’s credit rating follows a similar move by the other two major international credit rating agencies – Moody’s and Standard & Poor’s.
In its announcement, Fitch said: “The downgrade to ‘A’ reflects the impact of the ongoing war in Gaza, heightened geopolitical risks and military operations on multiple fronts. Public finances have been affected and we expect a budget deficit of 7.8% of GDP in 2024 and debt to remain above 70% of GDP over the medium term. In addition, World Bank governance indicators are likely to deteriorate, weighing on Israel’s credit profile.”
Regarding the negative outlook, Fitch said: “The negative outlook reflects the risk of further escalation of the conflict, which could lead to additional pressure on the rating through its impact on macroeconomic performance, fiscal position, external financing and political stability.” The agency also points to rising regional tensions, adding: “Tensions between Israel and Iran and its allies remain elevated,” citing recent events and the risk of further escalation.
Fitch expects the war to continue throughout 2024 with the possibility of continued intense activity in 2025, which will impact military spending, economic activity in border areas, and the tourism and construction sectors.
From a fiscal policy perspective, rating agencies see the fiscal balance at 7.8% of GDP by end-2024, then declining to 4.6% next year. However, Fitch stressed that financing conditions remain stable with successful debt issuances in international and domestic markets.
Fitch also attributes the political situation in Israel to the downgrade. The agency wrote: “The emergency government was dissolved in June 2024 and the original coalition returned to power. It may remain in power until the next elections in October 2026, although coalitions rarely last a full term, and this coalition will face pressure to hold early elections, given the events of October 2023 and the controversy over the conscription of ultra-Orthodox Jews.”
The downgrade by Fitch comes after the agency left Israel’s credit rating unchanged in April while lowering its outlook from stable to negative. The current decision represents a further deterioration in the agency’s assessment of Israel’s economic situation.
Accountant General: Work on preparing the 2025 state budget responsibly as soon as possible
The Finance Ministry’s Accountant General Yali Rotenberg said of the downgrade: “The continuation of the war and the rise in geopolitical risks affect the financial statements and thus the credit rating profile of the State of Israel. Despite the war, the State of Israel demonstrates very high accessibility to capital markets in Israel and the world, with stable financing conditions and strong demand for debt in the domestic market.
“The Israeli economy is strong, innovative and diversified, with deep and liquid financial markets, and will know how to deal with all the challenges we face. However, we must create as much certainty as possible for the Israeli economy, investors and rating agencies. To this end, it is necessary to move as soon as possible to formulate a responsible state budget for 2025 based on a process of rebuilding financial reserves through a gradual reduction in the ratio of GDP to debt. This, along with strengthening growth engines, investing in infrastructure, responding to social needs and an organized and targeted response to defense needs.”
This article was published in Globes, Israeli Business News – en.globes.co.il – on August 12, 2024.
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