Israel’s credit rating has suffered a significant blow, with Fitch Ratings downgrading the nation’s status amid escalating concerns surrounding the relentless war with Hamas and escalating geopolitical risks. This alarming downgrade marks a critical moment in Israel's financial and political landscape, emphasizing the severe economic repercussions of the ongoing conflict.
The Downgrade and Its Implications
Fitch Ratings has reduced Israel’s credit rating from a robust “A+” to a less secure “A,” while maintaining a negative outlook on the country’s financial future. This suggests that further downgrades could be on the horizon if the situation fails to stabilize. This decision by Fitch highlights the staggering financial burden imposed by the war, which has resulted in a catastrophic loss of life and has sent shockwaves across the region and the globe. Analysts from Fitch have ominously predicted that “the conflict in Gaza could last well into 2025,” exacerbating fears of a protracted and expanding war.
“The downgrade to ‘A’ reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks, and military operations on multiple fronts,” Fitch stated. This reflects a grave concern over Israel’s ability to manage its financial commitments in the face of ongoing hostilities.
Fitch cuts Israel’s credit rating, citing geopolitical turmoil.
— CTech (@Calcalistech) August 13, 2024
Gaza conflict and rising regional tensions drive negative outlook.https://t.co/rdv7DtGId6
The Human and Economic Toll
The conflict’s human cost is devastating. Israeli military actions in Gaza have reportedly killed nearly 40,000 Palestinians and injured over 90,000, according to Gaza’s Ministry of Health. These actions follow Hamas’ brutal attack on Israel on October 7, which resulted in the tragic loss of at least 1,200 Israeli lives and the abduction of more than 250 individuals, as reported by Israeli authorities.
In response to Fitch’s decision, Israel’s Finance Minister Bezalel Smotrich acknowledged the downgrade as a “natural” consequence of the war and the prevailing geopolitical risks. However, he emphasized that Israel’s economy remains resilient. “Israel’s economy is strong, and we are navigating it correctly and responsibly,” Smotrich asserted in a statement on X. He highlighted that “the economic indicators point to the economy’s robustness and the high trust we have in the markets.”
🚨🇮🇱ISRAEL’S CREDIT RATING DOWNGRADED—WHAT CAUSED IT?
— Mario Nawfal (@MarioNawfal) August 12, 2024
Fitch Ratings announced that Israel's credit rating dropped from A+ to A with a negative forecast.
Continued War Drives Downgrade: Israel's credit rating has been downgraded to 'A' due to the ongoing Gaza conflict, increased… pic.twitter.com/rmKIhoGwKk
Escalation and Aid
As ceasefire negotiations stall, the conflict’s intensity continues unabated. Over the weekend, an Israeli air strike tragically claimed the lives of at least 93 Palestinians in a school and mosque in Gaza, according to local officials. Amidst this turmoil, the United States has pledged a substantial $3.5 billion in military aid to Israel, as reported by CNN.
Fitch warned of the broader economic ramifications: “In addition to human losses, the conflict in Gaza 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.” This bleak forecast suggests that the financial strain on Israel could worsen, potentially complicating the nation’s ability to secure affordable loans. Despite the downgrade, an “A” rating remains within the investment grade category, indicating relative safety among debt issuers.
Financial Projections
Fitch anticipates Israel’s budget deficit will surge to 7.8% of its gross domestic product (GDP) in 2024, up from 4.1% in 2023. “We will pass a responsible budget that will continue to support all the needs of the war on all fronts until victory,” Smotrich declared, reaffirming the government’s commitment to a comprehensive military strategy.
The central government’s mounting budget deficit is attributed to ongoing military operations, efforts to mitigate economic disruptions, and relocation expenses for northern Israel amid the looming threat from the Lebanese militant group Hezbollah. Fitch also predicts Israel’s debt-to-GDP ratio will exceed 70% into 2025, significantly higher than the median A rating ratio of 55%.
Israel’s sovereign debt was cut by one notch by Fitch, which kept a negative outlook on the credit as continued military conflict weighs on the country’s public finances https://t.co/pDsWkVibXo
— Bloomberg (@business) August 12, 2024
Path to Recovery
Fitch indicated that de-escalating the conflict and implementing fiscal reforms to lower the debt-to-GDP ratio could help Israel regain its former credit rating. However, the path to financial stability appears arduous.
In February, Moody’s Investors Service also downgraded Israel’s credit rating from A1 to A2, still within investment grade. Moody’s cited the ongoing military conflict with Hamas, its aftermath, and broader consequences as factors that “materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future.”
The credit rating downgrade serves as a stark reminder of the multifaceted challenges Israel faces. The ongoing conflict with Hamas not only poses severe humanitarian concerns but also threatens to undermine Israel’s economic stability and international financial standing. As the nation navigates this turbulent period, the resilience of its economy and the efficacy of its political leadership will be crucial in determining its future trajectory.
