Fitch Ratings has lowered Israel's credit rating from A+ to A, citing ongoing geopolitical risks as the Israel-Hamas war continues. The agency maintained a negative outlook, indicating the possibility of further downgrades.
Key Points:
1. Fitch predicts the Gaza conflict could extend into 2025, with risks of expansion to other fronts.
2. The agency expects a permanent increase in Israel's military spending by nearly 1.5% of GDP compared to pre-war levels.
3. Fitch projects a 7.8% budget deficit for 2024 and forecasts debt to remain above 70% of GDP in the medium term.
4. Political challenges and coalition dynamics may hinder necessary corrective measures, according to the agency.
5. This marks the third credit rating downgrade for Israel since the war's onset, following similar moves by S&P and Moody's.
Implications of the Downgrade
The downgrade to A from A+ reflects the significant impact of the ongoing conflict on Israel's economy and fiscal position.
This lower rating could have several negative consequences for Israel:
1. Higher borrowing costs: The downgrade may lead to increased interest rates on government bonds, making it more expensive for Israel to borrow money in international markets.
2. Reduced investor confidence: A lower credit rating could deter some investors, particularly those with strict investment grade requirements, potentially limiting Israel's access to capital.
3. Economic pressure: The combination of higher borrowing costs and potential reduction in foreign investment could put additional strain on Israel's economy, already burdened by war-related expenses.
4. Currency impact: The shekel has already weakened following the announcement, and continued pressure could lead to higher import costs and inflation.
Outlook and Future Risks
The negative outlook suggests Fitch sees more downside risks than upside potential in the near term.
Finance Minister Bezalel Smotrich described the downgrade as "natural" during wartime, expressing confidence in Israel's economic recovery. However, the shekel fell 1.7% against the dollar, and Tel Aviv stocks closed over 1% lower following the announcement, indicating immediate market concern.
The Finance Ministry's chief accountant urged swift action on a responsible 2025 state budget to provide economic certainty for investors and rating agencies.
* The Times of Israel contributed to this article.
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