Credit rating agency Fitch issued an update today (Thursday) suggesting that the recent ceasefire with Hezbollah could ease pressure on Israel's sovereign credit rating and government expenditure, marking a potential positive turning point for the nation's economic outlook.
Fitch noted that the 60-day ceasefire that began November 27 could significantly reduce strain on Israeli government spending. However the tempered this optimism by emphasizing that the Lebanon ceasefire remains fragile and prospects for a Gaza ceasefire remain low.
The update follows Fitch's August 2024 decision to downgrade Israel's rating to 'A' with a negative outlook, citing concerns about prolonged military conflicts impacting the economy and government spending. The escalation with Hezbollah has particularly strained Israel's fiscal metrics through reserve force deployment costs along the northern border, military supply expenditure, compensation for affected residents, and decreased economic activity.
While military mobilization related to Lebanon since October 2024 represents only a fraction of Gaza operations, Fitch warned that a prolonged Lebanon conflict could impede Israel's ability to control its budget deficit. The agency expects the Gaza conflict to continue into 2025, albeit at varying intensities, leading to sustained high military expenditure and disruption to production in border regions, as well as ongoing impacts on tourism and construction.
The report highlighted significant uncertainty regarding Israel's medium-term fiscal measures. According to Fitch, the budget deficit could remain above debt-stabilizing levels beyond 2026, with the trajectory dependent on the sustainability of high military spending levels, coalition priorities, and the pattern of economic recovery.
On the regional front, while a sustained ceasefire would remove a major factor in the Israel-Iran conflict, Fitch emphasized that risks of broader regional escalation involving Iran remain significant. The agency noted that the incoming Trump administration's approach to Iran could substantially impact Israel's regional policy.
Fitch concluded by noting that significant regional conflict escalation could affect ratings across multiple Middle Eastern countries and potentially impact global oil prices.
Moody disagrees with Fitch's assessment.
Moody's credit rating agency has kept Israel's rating unchanged while highlighting growing domestic concerns.
In its latest assessment, the agency noted that while military tensions may have eased, internal political divisions pose significant risks to the country's stability.
The report specifically criticized the Israeli government's policies, which it claims are exacerbating existing social tensions. Moody is specifically worried about these two issues:
- The ongoing conflict between the government and judiciary over Supreme Court appointments
- Controversial legislation aimed at permanently exempting ultra-Orthodox Jews from mandatory military service – a proposal that faces widespread public opposition.
"While geopolitical risks have somewhat subsided, domestic political challenges continue to present significant concerns," the rating agency stated, emphasizing that these internal disputes could have long-term implications for Israel's economic stability.
