On Tuesday, the Fitch credit ratings agency downgraded Israel’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to “A” from “A+.” The agency also said that “The Outlook is Negative” for Israel.
In explaining the decision, Fitch said it downgraded Israel to an “A” rating because of the “impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts.”
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“In our view, the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts,” said Fitch.” 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.”
Fitch also explained that Israel’s public finances have been ‘hit” and that it projects the country will see a budget deficit of 7.8% of GDP in 2024 and its debt will remain above to 70% of GDP in the medium term.
The agency also cited the fact that World Bank Governance Indicators are likely to deteriorate, weighing on Israel’s credit profile.
The office of Israel’s Prime Minister Benjamin Netanyahu issued a statement dismissing the Fitch downgrading saying, “The Israeli economy is strong and is functioning well. The lowering of the rating is a result of Israel having to cope with a multi-front war that was forced on it.”
The statement added, “The rating will be raised again when we win – and we will win.”
Israel’s Finance Minister Bezalel Smotrich had a similar response to the downgrade.
“The State of Israel is in the midst of an existential war, the longest and most expensive in its history,” he said in a statement. “A war that is being waged on several fronts at the same time and has been going on for almost a year. The downgrade during the war and the geopolitical risks it creates is natural.”
“Israel’s economy is strong and we navigate it correctly and responsibly,” he added. “The economic indicators indicate the robustness of the economy and the high confidence we have in the markets.”
“We will win the war on all fronts, restore security and raise the economy from a war to a growth path. We will pass a responsible budget that will continue to support all the needs of the war on the front and in the rear until victory, while maintaining fiscal frameworks and promoting growth engines. Very quickly the credit rating will rise again.”
Fitch, however, did acknowledge this and listed the factors that could, individually or collectively, lead to a rating upgrade for Israel. These factors include a de-escalation of the current conflicts (in Gaza and with the Hezbollah terrorist organization in Lebanon), and containing the impact on the economy and public finances.
Fitch’s credit rating scale for issuers and issues is expressed using the categories ‘AAA’ to ‘BBB’ (investment grade) and ‘BB’ to ‘D’ (speculative grade) with an additional +/- for AA through CCC levels indicating relative differences of probability of default or recovery for issues. “A” ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
So, according to Fitch, Israel still has a strong rating.
