Fitch downgrades Israel’s credit rating due to Gaza War, looming Iran threat

Fitch Ratings is 3rd agency to downgrade Israel amid war

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Fitch Ratings became the latest credit rating agency to downgrade Israel’s credit rating, lowering it from "A-plus" to "A" on Monday. The agency cited the ongoing Gaza War and deteriorating geopolitical outlook as reasons for the downgrade.

Fitch also kept the negative rating outlook, citing the growing threat of escalation with Iran and Hezbollah. A negative outlook indicates that further downgrades are possible.

“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,” the agency said in its report.

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

“In addition to human losses, it could result in significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment, leading to a further deterioration of Israel's credit metrics,” the report continued.

The credit ratings agency also cited escalating hostilities between Israel and its enemies, such as Iran and Hezbollah, saying tensions “remain high.”

High military expenses and disruption to production, particularly agriculture, were significant factors in its decision to downgrade.

“The war will likely continue until end-2024 with a risk of intense operations continuing beyond. This implies continued high spending on immediate military needs, and disruptions to production in the border areas and in tourism and construction. Israel has demobilized most of its reservists, reducing the impact on the workforce,” the report noted.

Fitch is the third such agency to lower Israel’s credit rating due to the war.

In February, Moody’s cut Israel’s credit rating to “A2” because of the war, while Fitch, at the time, kept its “A+” rating but issued a negative outlook.

In April, S&P Global downgraded the country’s credit rating from “AA-” to “A+” while also citing “increased geopolitical risks.”

Israeli Finance Minister Bezalel Smotrich did not appear surprised by Fitch’s downgrade, emphasizing that Israel’s economy remains strong despite the war.

“The State of Israel is in the midst of an existential war, the longest and most expensive in its history. A war that is being waged on several fronts at the same time and has been going on for almost a year,” Smotrich said.

“The downgrade following the war and the geopolitical risks that it produces is a natural one.”

“Israel's economy is strong and we are navigating it correctly and responsibly. The economic indicators point to the economy's robustness and the high trust the markets have in us,” Smotrich said, adding that he expects the nation’s credit rating to improve after the war ends.