Fitch Ratings downgraded Israel’s credit rating to “A” from “A-plus” on Monday, citing heightened geopolitical risks, the ongoing Gaza war, and military activities on multiple fronts.
“Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above 70% of GDP in the medium term. In addition, World Bank Governance Indicators are likely to deteriorate, weighing on Israel’s credit profile,” Fitch said in a statement.
The agency also noted that the extension of the Gaza war, or broadening of the conflict, could further harm Israel’s economy and public finances, leading to another downgrade.
The risk of “intense operations” in Gaza going well beyond 2024 suggests continued high military spending, disruption of production in border areas and depressed tourism and construction, Fitch said.
A broader war would result not only in human losses but in more military spending, destruction of infrastructure and “more sustained damage to economic activity and investment, leading to a further deterioration of Israel’s credit metrics,” said the ratings agency.
It noted various events in the region, including the July 27 Hezbollah missile attack on Majdal Shams in the Golan Heights, which killed 12 children, followed by Israel’s strike on a Hezbollah commander on July 30 and the assassination of Hamas leader Ismail Haniyeh on July 31, (the latter of which Israel did not take credit for).
“These attacks highlight the high level of tensions in the region and the risk of escalation that could further damage Israel’s credit profile,” it said.
The Prime Minister’s Office said, responding to the news, “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.”
Factors Fitch cited that could lead it to upgrade Israel’s credit rating are a de-escalation of the conflicts and greater confidence that the debt-to-GDP ratio will return to a downwards trend.
Fitch projected debt-to-GDP to rise to 70% in 2024 and 72% in 2025, above the 71% peak reached during the Covid-19 pandemic in 2020.
The credit agency expects Israel to permanently increase its military spending by close to 1.5% of GDP versus pre-war levels.
It also said that Israel will boost its border presence, expand the draft and increase domestic military production, all of which will add to spending.
