Credit rating agency also keeps outlook negative, meaning further drop possible, says ‘political fractiousness and coalition politics’ risk hampering essential corrective measures

Credit ratings agency Fitch downgraded Israel’s credit rating from A+ to A on Monday, citing worsening geopolitical risks as the Israel-Hamas war drags on.

It also kept the rating outlook negative, which means a further downgrade is possible.

“In our view, the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts,” the ratings agency said in a statement.

Finance Minister Bezalel Smotrich downplayed the move as “natural” amid a war and said Israel’s economy would bounce back following responsible steps he plans to advance.

Fears that the conflict in Gaza could turn into a broader Middle East war escalated late last month after the killing of Hamas leader Ismail Haniyeh in Iran and top Hezbollah military commander Fuad Shukr in Beirut. Israel’s shekel fell as much as 1.7% against the dollar on Monday and stocks ended over 1% lower in Tel Aviv, as investors fret over a possible attack on Israel.

Heightened tensions between Israel and Iran and its allies could imply significant additional military spending, destruction of infrastructure and damage to economic activity and investment, Fitch said. The ratings agency expects the Israeli government to permanently increase military spending by close to 1.5% of GDP versus pre-war levels as the country strengthens its border defenses. “Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above 70% of GDP in the medium term,” Fitch said. It forecast that the country’s debt will remain on an upward trend beyond 2025 if higher military spending and economic uncertainties continue.

Other factors driving the downgrade are the country’s “political fractiousness, coalition politics and military imperatives” that are putting new fiscal consolidation measures at risk, Fitch added.

Fitch is the third global credit agency to lower Israel’s credit rating since the outbreak of the war, joining S&P and Moody’s. In April, Fitch removed Israel from “credit rating negative” and affirmed the country’s A+ credit rating — but with a negative outlook — citing uncertainty about the duration and magnitude of the war with Hamas and its toll on the government’s debt burden.

In response to the downgrade, the Finance Ministry’s top accountant Yali Rothenberg called on the government to create as much certainty as possible for the Israeli economy, investors and rating agencies by acting swiftly to formulate a responsible state budget for 2025.

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