International ratings agency Fitch has announced that it is keeping Israel's long-term sovereign credit rating unchanged at A with a negative outlook. The neutral rating decision comes after Fitch cut Israel's rating in its previous announcement in August 2024.
The announcement said that Israel's unchanged rating, "Balances a diversified, resilient and high value-added economy and strong external finances against a high public debt/GDP ratio, still elevated security risks, and a record of unstable governments that has hindered policymaking. The Negative Outlook reflects rising public debt, domestic political and governance challenges and uncertain prospects for the conflict in Gaza."
On Israel's high but declining fiscal deficit, Fitch wrote, "We project Israel's central government cash budget deficit to decline to 5.7% of GDP in 2025, from 6.8% in 2024, driven by a combination of higher revenue and lower military spending. The newly-adopted 2025 budget aims to raise revenue, with a 1pp VAT rate increase, a tax indexation freeze and various tax hikes, including on undisbursed dividends. In our view, expenditure reductions, in particular on public sector wages, will partly offset spending pressures for specific budgetary allocations to support the coalition parties' agendas and for the military. Our 5.7% fiscal deficit is higher than the 4.9% target set in 2025 budget, due to the ongoing war in Gaza that is not fully captured in the adopted budget." Fitch predicts that the deficit will fall to 4.4% of GDP in 2026, "Assuming a lower exceptional military spending."
Risk of a rating cut in the future
Fitch's decision to keep the rating unchanged was expected by most in the market. Some forecasters believed that, had it not been for the escalation in recent weeks in the security arena and in the country's internal domestic political disputes, there would have been a real chance of Fitch upgrading its rating outlook for Israel from negative to stable. Leaving the negative outlook intact leaves the risk of a rating downgrade in the company's next announcements.
Fitch made the rating decision following a visit by a delegation of its analysts to Israel in recent weeks. During the visit, they held a series of meetings with senior government and economic officials. This is the first delegation from a rating agency to visit Israel since the start of the war, while talks last year were conducted online or during meetings abroad.
Three global agencies rate the countries of the world, including Israel, according to the level of risk of defaulting on their debts. Updates are usually made twice a year. While Israel's rating by Fitch and S&P remains at a relatively respectable level of A, even after suffering downgrades last year, the third company, Moody's, rates the country two notches lower - at a medium-low level of Baa1.
Moody's chose last month to skip the current rating round and did not update Israel's status at all. With the publication of Fitch's rating announcement, the latest round of ratings will be completed next month, after the decision is made by the third company - S&P.
Published by Globes, Israel business news - en.globes.co.il - on March 31, 2025.
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