Israel’s credit rating has been downgraded by Fitch Ratings from A+ to A, with a “negative” country outlook classification. This downgrade is a result of multiple factors, including the ongoing war in Gaza, heightened geopolitical risks, and military operations on various fronts. The conflict in Gaza is expected to continue well into 2025, and there are concerns that it could expand to other areas. This prolonged conflict has significant implications for Israel’s credit metrics, including increased military spending, infrastructure destruction, and damage to economic activity and investment.
Fitch Ratings predicts that Israel’s budget deficit will reach 7.8 percent of GDP this year, up from 4.1 percent in 2023. This increase is due to substantial military expenses and the relocation of people in the northern part of the country. While the deficit is expected to decrease to 4.6 percent in 2025, Fitch warns that it could be higher if the war extends into the next year. Additionally, Israel is projected to have a high debt-to-GDP ratio of 70 percent this year and 72 percent in the following year. This debt is expected to continue rising even after 2025 if there is increased permanent military spending and uncertain macroeconomic trends.
Israel’s debt is higher than the forecasted peer median for 2025, which is 55 percent. Fitch also expects the country’s World Bank Governance Indicators to deteriorate further, adding more pressure to its credit profile. However, Israel’s Finance Minister, Bezalel Smotrich, views Fitch’s downgrade as a natural decision given the ongoing war. Smotrich believes that Israel’s strong economy and responsible navigation will lead to a rise in credit rating once the war is over. The country aims to win the war, restore security, and put the economy on a growth path through the implementation of a responsible budget and promotion of growth.
While the ongoing conflict has negatively impacted Israel’s economic outlook, its tech sector has remained resilient. According to a report by Startup Nation Central, Israel’s tech sector has seen a significant increase in private funding, with a 31 percent rise in the first half of the year compared to the same period in the previous year. Local companies raised $5.1 billion in funding, with the cybersecurity sector receiving over half of the private investments. This growth indicates confidence in Israeli tech innovation, despite the challenges of raising capital and growing companies.
The geopolitical risks surrounding Israel have also influenced its long-term ratings. S&P Global downgraded Israel’s long-term ratings from A+ to AA- due to heightened geopolitical risks. While S&P predicted that a wider regional conflict would be avoided, it anticipated the continuation of the Israel-Hamas war and regular exchanges of fire with Hezbollah at the northern border. Under these conditions, Israel’s growth rate is expected to decline from 2 percent in the previous year to 0.5 percent in 2024.
Tensions in the region escalated following a strike by Hezbollah that resulted in the death of twelve children at a soccer field in Israel. In response, Israel targeted and killed Hezbollah’s top commander. This incident, along with the ongoing conflict, prompted the United States, Qatar, and Egypt to issue a joint statement calling for a cease-fire agreement.
In conclusion, Israel’s credit rating downgrade by Fitch Ratings reflects the impact of the ongoing war in Gaza, heightened geopolitical risks, and military operations on multiple fronts. The country’s budget deficit is projected to increase, and its debt-to-GDP ratio is expected to remain high. Despite these challenges, Israel’s tech sector has shown resilience with increased private funding. The geopolitical risks in the region have also influenced Israel’s long-term ratings. Overall, the situation highlights the complex dynamics between conflict and economic stability.
