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Home Economy Business & Finance

What caused Fitch to lower Israel's rating?

"The downgrade to 'A' reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts," Fitch stated in its report. The agency projects Israel's budget deficit to reach 7.8% of GDP in 2024, with public debt expected to remain above 70% of GDP in the medium term.

by  Erez Linn
Published on  08-12-2024 17:44
Last modified: 08-13-2024 15:26
S&P sounds alarm over judicial reform, cites potential 'domestic political confrontation'Reuters/Nir Elias

The Shekel has depreciated in the wake of the recent events | Illustration: Reuters/Nir Elias

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In a significant move reflecting the ongoing tensions in the Middle East, Fitch Ratings has downgraded Israel's Long-Term Foreign-Currency Issuer Default Rating (LTFC IDR) from 'A+' to 'A', with a negative outlook. This decision follows a similar downgrade by Moody's in February, marking a concerning trend for Israel's economic outlook.

The decision, announced on Monday comes as Israel continues its military operations in Gaza, which Fitch expects could last well into 2025. The rating agency cited the prolonged conflict's impact on public finances, heightened geopolitical risks, and potential deterioration of governance indicators as key factors driving the downgrade. "The downgrade to 'A' reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts," Fitch stated in its report. The agency projects Israel's budget deficit to reach 7.8% of GDP in 2024, with public debt expected to remain above 70% of GDP in the medium term.

The Prime Minister's Office:

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.

— Prime Minister of Israel (@IsraeliPM) August 13, 2024

Prime Minister Benjamin Netanyahu dismissed the decision as temporary, saying Israel's economy was withstanding the immense pressure since the Oct. 7 war started. "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," Netanyahu's office wrote on X.

This assessment aligns with Moody's February report, which highlighted the substantial increase in Israel's geopolitical risks. Moody's had downgraded Israel's credit rating to A2 (equivalent to Fitch's 'A'), marking the first-ever downgrade of Israel's credit rating since it was added to the rankings in 1995. The ongoing conflict has led to significant additional military spending and damage to economic activity and investment. Fitch warns that these factors could lead to a further deterioration of Israel's credit metrics if the situation persists or escalates. Moody's had similarly noted that Israel's defense spending was expected to almost double by the end of 2023 compared to 2022 levels.

Regional tensions remain high, with recent incidents highlighting the volatile nature of the conflict. On July 27, a rocket attack in the Golan Heights killed 12 civilians, carried out by Hezbollah. Subsequently, Israel was believed to be involved in the assassination of a Hamas leader in Iran on July 31 and conducted an attack on a Houthi-controlled port in Yemen following a drone attack on Israel.

The site of the barrage on northern Israel (Courtesy) Courtesy

Despite these challenges, Israel's external balance sheet remains stronger than its peers, with a net external creditor position of 64.2% of GDP at the end of 2023. The Bank of Israel's foreign exchange reserves increased to USD2134 billion in July 2024, up from USD2047 billion at the end of 2023, Fitch said.

Fitch projects current account surpluses for Israel at 4.3% of GDP in 2024 and 3.9% in 2025, compared to 4.8% in 2023. However, the agency warns that domestic political fractiousness and coalition politics could hinder fiscal consolidation plans, presenting a risk to their forecast. Both Fitch and Moody's noted the potential for escalation, particularly with Hezbollah in northern Israel. Moody's had warned that such an escalation "would pose a much greater risk to Israeli territory, and is expected to include significant damage to infrastructure, remobilization of reserve soldiers and further delays in allowing evacuated residents to return to the area."

While the emergency government formed in response to the conflict was dissolved in June 2024, with the original coalition returning to power, Fitch expects ongoing pressure for early elections given the events of October 2023 and controversy over the conscription of ultra-orthodox Jews. This aligns with Moody's concern about potential domestic political turmoil once the national unity government is no longer in place.

Tags: EconomyFitch RatingsGaza WarIsrael

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