While the State of Israel awaits an expected attack by Iran and Hezbollah, and in the background of reports of an earthquake in the north and center of the country – the real earthquake was felt tonight (between Monday and Tuesday) precisely in the economy, with the announcement by the Fitch company about lowering Israel’s credit rating, and attaching a negative forecast.
What’s the big story?
The international credit rating company announced its decision to lower Israel’s credit rating from level A+ to level A with a negative outlook, saying that the rating may drop again with a high probability in the near future. Fitch predicts a budget deficit of 7.8% of GDP in 2024, and that the debt-to-GDP ratio will remain above 70% in the medium term. Let’s recall that today the deficit is 8.1% of GDP and that the deficit ceiling set is 6.6%.
Fitch announced the downgrading of Israel’s credit rating with a negative outlook
Against the background of the vigilance: an earthquake was felt tonight in the north and center of the country
What is the reason for the decision?
According to the company’s statement, the basis of the decision is “the continuation of the war, increased geopolitical risks and military operations on several fronts”. The company also reasons that in its estimation, the war may continue until 2025 and there is great potential for the fighting to expand to other fronts – which will entail significant military expenditures, destruction of infrastructure and continued damage to economic activity and investments in the economy.
Fitch also states that an important factor in its decision is the failure to make the necessary economic decisions in the current situation, and say that “political polarization, coalition needs and military needs may delay the convergence plan” – that is, the cutback plans for 2025, which are intended to help the economy overcome spending the heaviness of the war.
What does the lowering of the credit rating mean?
A downgrade of the credit rating by an international rating company such as Fitch could have serious consequences for the country’s economy. Such a decision could be interpreted in the eyes of foreign investors as a sign of Israel’s financial instability. Furthermore, it would indicate a higher economic risk – which may lead to interest rates higher on its debts and loans.
In addition, there may also be a drop in the shekel exchange rate. Downgrading a country’s credit rating may cause the local currency to fall against foreign currencies, raising the risk premium.
It should be said – these are not definite rulings. A country with a relatively stable economy, like Israel, has the potential ability to deal with a downgrade better. For example, last February, after Moody’s lowered Israel’s rating, the Tel Aviv Stock Exchange actually recorded increases throughout that month, the stock and bond indices recorded price increases and the shekel even strengthened against the euro and the dollar.
How did the other rating companies behave?
Four months ago, following the Iranian drone attack, the S&P rating agency lowered Israel’s credit rating from AA minus to A plus.
As mentioned, in February Moody’s downgraded the rating and changed the forecast to negative. This is the first time that Israel’s credit rating has fallen, since it entered the measurements of international companies in 1998.
Is there room for optimism?
about. The good news that the company gives is the fact that despite the shocks in the economy, Israel’s external balance remains stronger than that of the reference countries. The net external lender position stood at 64.2% of GDP at the end of 2023. In addition, the Bank of Israel’s foreign exchange reserves increased to a total of $213.4 billion in July 2024. Fitch expects a current account surplus of 4.3% of GDP in 2024 and 3.9% in 2025 (this compared to 4.8% in 2023).¬
The reactions in Israel
Prime Minister Netanyahu responded to Fitch’s announcement and noted that “the Israeli economy is robust and functioning well. The downgrade is a consequence of Israel’s dealing with a multi-arena war that has been imposed on it. The rating will rise again when we win – and we will indeed win.”
But Netanyahu forgot an important detail. The company specifically stated that a main factor in the downgrading of Israel’s credit rating is the failure to make required economic decisions in the government as well as “political polarization and considerations arising from coalition needs, which may pose a risk to the company’s forecasts.”
The Accountant General at the Treasury, Yehli Rotenberg, said in response to Fitch’s decision that “the Israeli economy will know how to deal with all the challenges we face. However, we must create as much certainty as possible for the Israeli economy, investors and rating companies. To this end, we must act as soon as possible to formulate a responsible state budget for 2025, based on a process of rebuilding the fiscal reserves through a gradual decrease in the debt-to-GDP ratio.”
The Minister of Finance, Bezalel Smotrich, also responded to the downgrade: “The State of Israel is in the midst of an existential war, the longest and most expensive in its history. The economic indicators indicate the strength of the economy and the high confidence we have in the markets. We will pass a responsible budget that will continue to support all of Israel’s needs The war is on the front and the rear until victory, while maintaining fiscal frameworks and promoting growth engines. Very quickly the credit rating will rise again.”
