Fitch downgrades Israel’s credit rating

Credit ratings agency Fitch downgraded Israel’s credit rating from “A-plus” to “A” on Monday, citing the escalating geopolitical risks and ongoing conflict in Gaza.

The rating outlook remains negative, indicating the potential for further downgrades as the situation unfolds.

Impact of Gaza conflict on Israel’s creditworthiness

The conflict, sparked by a Hamas-led cross-border attack on Oct. 7, has led to significant loss of life and a deepening humanitarian crisis.

Fitch warned that the conflict could extend well into 2025, with the risk of spreading to other fronts.

“In our view, the conflict in Gaza could last well into 2025, and there are risks of it broadening to other fronts,” the agency stated.

Market reaction, economic implications

Following the downgrade, Israel’s shekel fell by as much as 1.7% against the dollar, and stocks in Tel Aviv closed over 1% lower, reflecting investor concerns about the potential for a broader Middle East conflict.

The recent killings of Hamas leader Ismail Haniyeh in Iran and Hezbollah commander Fuad Shukr in Beirut have further heightened tensions.

Fitch highlighted the economic implications of the ongoing conflict, including increased military spending, infrastructure damage, and reduced economic activity and investment.

The agency expects Israel’s military spending to rise by nearly 1.5% of gross domestic product (GDP) compared to pre-war levels as the country strengthens its border defenses.

Public finances under strain

Fitch also projected that Israel’s public finances would suffer significantly, with a budget deficit expected to reach 7.8% of GDP in 2024.

The country’s debt is anticipated to remain above 70% of GDP in the medium term and could continue on an upward trajectory beyond 2025 if military spending and economic uncertainties persist.

*שר האוצר בצלאל סמוטריץ’ בתגובה להורדת הדירוג ע״י חברת פיץ’:*

מדינת ישראל נמצאת בעיצומה של מלחמת קיום, הארוכה ביותר והיקרה ביותר בתולדותיה. מלחמה שמנוהלת במספר חזיתות במקביל ונמשכת כבר כמעט שנה. הורדת הדירוג בעקבות המלחמה והסיכונים הגיאופוליטיים שהיא מייצרת היא טבעית.

כלכלת…

— בצלאל סמוטריץ' (@bezalelsm) August 12, 2024

Israeli Finance Minister Bezalel Smotrich acknowledged the downgrade, stating on X (formerly known as Twitter): “The downgrade following the war and the geopolitical risks it creates is natural.”