Fitch Ratings Downgrades Israel's Credit Rating to A with Negative Outlook

By Nathan Abbington

Fitch Ratings downgraded Israel's credit rating from A+ to A with a negative outlook late Monday, citing increased geopolitical risk and the ongoing Israel-Hamas conflict, which is expected to persist into 2025 and potentially expand. This downgrade reflects concerns about Israel's ability to manage debt amid heightened instability, which could make borrowing more expensive and deter investors.
The rating agency also highlighted potential political challenges to implementing essential financial reforms needed to address the economic fallout from the war. These obstacles could further impact their forecast, potentially leading to additional downgrades. It's current projection assumes that Israel will pursue fiscal consolidation, such as a 1% increase in VAT. However, they noted that political instability, coalition dynamics, and military priorities might obstruct these consolidation efforts, posing a risk to the forecast.
Fitch Ratings forecasted that Israel would face a budget deficit of 7.8% of GDP in 2024 and predicted that the country's debt would remain above 70% of GDP in the medium term. Specifically, the debt-to-GDP ratio is expected to reach 72% by 2025, surpassing the peak of 71% recorded during the 2020 coronavirus pandemic.
The agency warned that this debt ratio might continue to rise after 2025 if military spending remains high and macroeconomic conditions remain uncertain. Additionally, Fitch anticipated a decline in Israel's World Bank Governance Indicators, which could further impact the country's credit profile. These indicators assess various aspects of governance, including regulatory quality, control of corruption, political stability, and the rule of law. They also measure public engagement in governance, and a deterioration in these indicators would negatively affect Israel's credit rating.
Fitch Ratings indicated that a potential upgrade in Israel's credit rating could occur if the debt-to-GDP ratio starts to decline, which might result from effective fiscal reforms. This underscores the importance of the Israeli government demonstrating its ability to implement necessary reforms and mitigate the economic impact of the ongoing conflict.
The report also noted persistent regional tensions, particularly between Israel and Iran and its allies. Recent incidents, such as the attack on Majdal Shams and Israel's alleged involvement in the assassinations of Hamas and Hezbollah leaders, reflect the high levels of regional conflict. Fitch predicted a permanent increase in military spending to 1.5% of GDP as Israel maintains a more substantial military presence along its borders.
A budget deficit of 4.6% of GDP is anticipated for Israel in 2025, with expectations of reduced military spending and revenue growth, according to Fitch Ratings. However, the agency noted that this deficit could increase if the ongoing conflict persists. This forecast represents an increase from Fitch's previous April estimate of a 3.9% deficit for the same year.
Accountant General Yali Rothenberg addressed the ratings downgrade by affirming that Israel's economy remains resilient and capable of handling current challenges. He emphasized the need for creating economic certainty for investors and ratings agencies and stressed the importance of advancing a responsible budget for 2025.
Rothenberg called for a budget focused on rebuilding financial reserves while gradually reducing the debt-to-GDP ratio. He highlighted the need for investments in growth, infrastructure, social needs, and security. The downgrade follows Fitch's April decision to revise Israel’s outlook from stable to negative, and S&P’s unscheduled downgrade of Israel’s rating from A+ to AA- due to heightened geopolitical and security risks. 

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