Fitch Ratings has downgraded Israel’s credit rating from A+ to A, citing a negative outlook, signalling the possibility of further downgrades in the near future. This decision aligns Fitch with other major rating agencies, Moody’s and S&P, which downgraded Israel’s rating earlier in 2024.

The key factors driving Fitch’s decision include the prolonged conflict, increased geopolitical risks, and their physical and economic consequences. Fitch analysts highlighted concerns about Israel’s growing budget deficit, projecting it to reach 7.8% of GDP by the end of 2024, exceeding both the Israeli Treasury’s and the Bank of Israel’s estimates of 6.6%. This projected deficit is, however, slightly more optimistic than Moody’s and S&P’s forecasts of 8.5%.

Fitch also expressed concerns about Israel’s rising debt-to-GDP ratio, which is expected to increase from 60.5% in 2022 to 70% in 2024 and 72% in 2025, surpassing the levels seen during the 2020 COVID-19 pandemic. This figure is notably higher than the 55% median debt-to-GDP ratio projected for other A-rated countries in 2025, marking a significant shift in Israel’s economic stability.

Despite Fitch’s downgrade, Israel’s credit rating remains within the A category, indicating a relatively low credit risk. However, market conditions paint a less favorable picture, with the spread between Israel’s 10-year dollar bonds and U.S. Treasury bonds at 1.8%, a level typically seen in countries rated BBB minus. This suggests higher borrowing costs for Israel, comparable to nations like Romania, and highlights the growing pressure on rating agencies to reassess Israel’s creditworthiness.

The downgrade has not caused significant market turmoil, as the possibility of this action had been anticipated. However, experts warn that any further downgrades could have a more substantial impact on Israel’s financial stability.

The focus now shifts to how other rating agencies, particularly S&P, will respond to Fitch’s decision. With S&P previously warning that escalating security issues on Israel’s northern border could lead to a downgrade, the coming weeks will be critical in determining the future of Israel’s credit rating.

Fitch’s report also acknowledged Israel’s strong borrowing capacity, citing its current account surplus and significant foreign exchange reserves, which remain over $200 billion. However, Fitch cautioned that Israel’s ability to finance its deficit has eroded, with rising interest payments posing a significant challenge. The rating agency emphasized the need for Israel to take decisive action to maintain its financial resilience in the face of ongoing geopolitical and economic pressures.

Main photo: The Fitch Rating logo at their offices in London. Reuters/Reinhard Krause