In a significant move, Fitch Ratings has downgraded Israel’s credit rating from A+ to A, citing the ongoing conflict with Hamas in Gaza and the heightened geopolitical risks. The credit rating agency has also maintained a negative outlook, indicating that further downgrades are possible if the situation does not improve. This downgrade reflects the prolonged nature of the conflict, which Fitch warns could last well into 2025, and the potential for it to spread to other fronts, further impacting Israel’s economic stability.
The downgrade has immediate and far-reaching implications for Israel’s economy. The country’s shekel has already fallen by 1.7% against the dollar, and the Tel Aviv stock market has seen a decline of over 1%. Investors are increasingly concerned about the potential for further escalation of the conflict, which could lead to additional military spending, destruction of infrastructure, and a slowdown in economic activity.
The Israeli government is now faced with the challenge of managing a growing budget deficit, projected to reach 7.8% of GDP in 2024. This deficit is driven by the costs associated with military operations, economic damage mitigation, and relocation expenses for those affected by the conflict. The government will need to implement responsible fiscal measures to stabilize the economy and reassure investors.
Geopolitical Risks and Regional Tensions
The ongoing conflict with Hamas is not the only source of concern for Israel. Tensions with Iran and its allies, including Hezbollah, remain high. Recent incidents, such as the killing of Hamas leader Ismail Haniyeh in Iran and a top Hezbollah commander in Beirut, have escalated fears of a broader Middle East war. These developments have significant implications for Israel’s security and economic stability.
Fitch’s downgrade highlights the risks associated with these geopolitical tensions. The agency warns that the conflict could result in significant additional military spending and sustained damage to economic activity and investment. The Israeli government will need to navigate these challenges carefully to avoid further deterioration of its credit profile.
Government Response and Future Outlook
In response to the downgrade, Israel’s Finance Minister Bezalel Smotrich has downplayed the move as a natural consequence of the ongoing war. He has expressed confidence that the Israeli economy will bounce back once the conflict is resolved and has outlined plans to advance responsible fiscal measures. However, the path to recovery will be challenging, given the current geopolitical landscape.
The Israeli government is also exploring ways to increase domestic military production and strengthen its presence along its borders. These measures are aimed at enhancing national security and reducing reliance on foreign military support. While these steps are necessary, they will also add to the country’s fiscal burden.
Looking ahead, the duration and intensity of the conflict will play a crucial role in determining Israel’s economic future. If the war continues well into 2025, as Fitch predicts, the country will face prolonged economic challenges. The government’s ability to implement effective policies and manage the geopolitical risks will be key to restoring stability and growth.
