International credit ratings agency Fitch announced last night that it has downgraded Israel’s long-term foreign currency issuer default rating to A from A+, with a negative outlook. Fitch’s rating cut for Israel follows a similar move by the two other major international credit ratings agencies - Moody’s and S&P.
In its announcement, Fitch said, "The downgrade to 'A' reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations 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 to 70% of GDP in the medium term. In addition, World Bank Governance Indicators are likely to deteriorate, weighing on Israel's credit profile."
Regarding the future negative outlook, Fitch said, "The negative outlook reflects the risk of another escalation of the conflict, which could lead to additional pressure on the rating through its impact on macroeconomic performance, the fiscal situation, external financing and political stability." The agency also refers to growing regional tensions, and adds, "The tension between Israel and Iran and its allies remains high," while mentioning recent events and the risk of a further escalation.
Fitch sees the war continuing throughout 2024 with the possibility of intensive operations continuing in 2025, which will affect military spending, economic activity in border areas and the tourism and construction industries.
From a fiscal policy point of view, the ratings agencies believes that the fiscal budget will be 7.8% of GDP at the end of 2024, falling to 4.6% next year. Nevertheless, Fitch stressed that financing terms remain stable with successful debt issues on the international and domestic markets.
Fitch also attributes the political situation in Israel to the rating cut. The agency wrote, "The emergency government was dissolved in June 2024 and the original coalition returned to power. It could remain until the next elections in October 2026, although coalitions rarely last a full term and this one will face pressure for early elections, given the events of October 2023 and controversy over the conscription of ultra-orthodox Jews."
Fitch’s downgrade now comes after the ratings agency kept Israel’s credit rating unchanged in April while downgrading its outlook from stable to negative. The current decision represents a further worsening in the agency’s assessment of the economic situation in Israel.
Accountant General: Work to form a responsible 2025 state budget as soon as possible
The Ministry of Finance accountant general Yali Rothenberg said about the rating cut, "The continuation of the war and the rise in geopolitical risk influences the fiscal data and accordingly the credit rating profile of the State of Israel. Despite the war, the State of Israel shows very high accessibility to the capital markets in Israel and the world, with stable financing conditions and a strong demand for debt in the domestic market.
"The Israeli economy is strong, innovative, diverse, has deep and liquid financial markets and will be able to deal with all the challenges we face. However, we must create as much certainty as possible for the Israeli economy, investors and rating companies. To this end, it is necessary to act as soon as possible to formulate a responsible state budget for 2025 based on a process of rebuilding the fiscal reserves through a gradual decrease in the GDP to debt ratio. This, along with the promotion of growth engines, investment in infrastructure, response to social needs and an orderly and defined response to defense needs."
Published by Globes, Israel business news - en.globes.co.il - on August 13, 2024.
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