Israel credit rating downgraded amid rising tensions in the Middle East

Israel’s credit rating was downgraded by Fitch last night from A+ to A with a negative outlook. 

The agency cited concerns around the ongoing war with Hamas and geopolitical risks. It said that “the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts” and added that 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.”

Fitch also noted the “high” tensions between Israel and Iran and its allies. This comes a day after  the leaders of Britain, France and Germany issued a strongly-worded warning to Iran not to mount any attack “that would further escalate regional tensions and jeopardise the opportunity to agree a ceasefire and the release of hostages”.

The agency predicts Israel’s budget deficit to reach 7.8 percent of its GDP in 2024, compared to 4.1 percent in 2023.It also expects Israel’s debt-to-GDP to remain above 70 percent into 2025, whereas the median A rating ratio is 55 percent.

A de-escalation of the conflict and fiscal reforms that lower the debt-to-GDP ratio could help the the country get its rating back up, noted Fitch.

The downgrade follows the decision in February by Moody’s to lower Israel’s rating from A1 to A2 – the first rating downgrade in Israel’s history.

Reacting to the Fitch downgrade, Prime Minister Benjamin Netanyahu’s office said: “Israel’s economy is resilient and functioning well.

“The rating downgrade is a result of Israel facing a multifront war that was imposed on it. The rating will rise back when we win — and we will indeed win.”

Professor Asher Blass, owner of Economic Research and Consulting Group (ERCG) and former chief economist at the Bank of Israel, said the decision by Fitch was “not unexpected” and that  “the warnings were apparently not addressed sufficiently.”

Accountant General Yali Rothenberg said: “The continuation of the war and the rise in geopolitical risks are impacting fiscal metrics and, consequently, Israel’s credit profile. Despite the war, Israel demonstrates very high access to capital markets both domestically and internationally, with stable financing conditions and strong demand for debt in the local market.

“The Israeli economy is strong, innovative, and diverse, with deep and liquid financial markets, and it will know how to handle any challenges that lie ahead. However, we must create as much certainty as possible for the Israeli economy, investors, and rating agencies. To this end, it is essential to promptly formulate a responsible state budget for 2025, which includes a process of gradually rebuilding fiscal reserves through a reduction in the debt-to-GDP ratio. This should be done alongside promoting growth engines, investing in infrastructure, addressing social needs, and providing an orderly and defined response to the needs of the defense system.”