THE FITCH ratings agency’s downgrading of Israel to ‘A’ reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts.
Fitch said: ‘Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above to 70% of GDP in the medium term.
‘In addition, World Bank Governance Indicators are likely to deteriorate, weighing on Israel’s credit profile.’
Fitch continued: ‘Geopolitical Risks Underpin Negative Outlook: In our view, the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts. In addition to human losses, it 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.’
The downgrade continues: ‘Regional Tensions: Tensions between Israel and Iran and its allies remain high. Hezbollah is believed to have been behind a rocket attack killing 12 civilians in the Golan Heights on 27 July and Israel killed a Hezbollah commander on 30 July in Beirut, is believed to have been involved in the assassination of Hamas leader Haniyeh in Iran on 31 July and attacked a Houthi-controlled port in Yemen following a drone attack on Israel.
‘These attacks highlight the high level of tensions in the region and the risk of escalation that could further damage Israel’s credit profile. Israel continues its operations in Gaza, having entered the City of Rafah and taken control of the border with Egypt. The war will likely continue until end-2024 with a risk of intense operations continuing beyond.
‘This implies continued high spending on immediate military needs, and disruptions to production in the border areas and in tourism and construction. Israel has demobilised most of its reservists, reducing the impact on the workforce. Wide Budget Deficits: We project Israel’s central government budget deficit to reach 7.8% of GDP in 2024 after 4.1% in 2023.
‘This reflects large outlays related to military operations, the mitigation of economic damage and relocation expenses for those in the north of the country. Revenue collection rebounded in 1H24 to a level above the amended budget and we expect it to remain strong during the rest of the year.
‘We project a budget deficit of 4.6% of GDP in 2025 on lower military spending and revenue growth, although it could be wider if the war continues in 2025.
‘Moreover, we expect the government will permanently increase military spending by close to 1.5% of GDP versus pre-war levels. Israel is likely to maintain a stronger presence along its borders than in the past, plans to widen mandatory draft and to increase domestic military production, which would also add to spending.’
Fitch continues: ‘Debt to Rise: Fitch projects debt-to-GDP to rise to 70% in 2024 and 72% in 2025, above the 71% peak during the pandemic in 2020. However, in the event of higher permanent military spending and uncertain macroeconomic trends, debt would remain on an upward trend beyond 2025.
‘Israel’s debt is higher than the forecast “A” peer median of 55% for 2025. Funding conditions have been solid during 2024 with USD8 billion issued on public markets, additional funding from private placements and robust demand for domestic debt.
‘Domestic Politics Remains Fractious: An emergency government was formed to include parties beyond the original coalition and to form a war cabinet including National Unity party leader Benny Gantz. The emergency government was dissolved in June 2024 and the original coalition returned to power.
‘It could remain until the next elections in October 2026, although coalitions rarely last a full term and this one will face pressure for early elections, given the events of October 2023 and controversy over the conscription of ultra-orthodox Jews.’
40,000 Israeli companies have closed since October amid expectations that the number will rise to 60,000 by the end of the year, Israel’s Maariv newspaper said yesterday. It added: ‘Up to 60,000 Israeli businesses may close in 2024 as war takes toll on economy.’
Hamas plays a decisive role since ‘after Hamas’s deadly attack on October 7, Israel’s stock market and currency nosedived’, it said.
Israel is in a desperate crisis that can only be resolved by the Palestinian masses winning their state and by that revolutionary action consigning the state of Israel to the dustbin of history!
