Fitch Ratings has affirmed Israel’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A’, maintaining a Negative Outlook. The decision reflects ongoing economic and geopolitical challenges that could impact Israel’s financial stability. This comes after Fitch downgraded Israel’s rating last August.
Despite global uncertainties, Israel’s economy remains resilient, supported by strong fiscal policies, a robust tech sector, and steady foreign investment. However, risks such as regional tensions, political uncertainty, and economic slowdowns contribute to the Negative Outlook assigned by Fitch.
The credit rating affirmation is crucial for investors, policymakers, and financial markets as it influences borrowing costs and economic forecasts. Analysts will be closely watching Israel’s fiscal strategies, inflation trends, and geopolitical developments in the coming months.
While Israel’s ‘A’ Long-Term IDR benefits from a diversified, resilient, and high value-added economy and solid external finances, the Negative Outlook reflects growing concerns, said Fitch. These include a rising public debt burden, domestic political and governance challenges, and the uncertain trajectory of the Gaza conflict. The country also faces persistent security risks and a track record of unstable governments that has hampered effective policymaking.
On the positive side, a perceived weakening of Iranian proxies in the Middle East has improved Israel’s regional standing, mitigating some associated credit risks, although sporadic incidents and tensions with Iran remain possible.
The high probability of a lasting ceasefire with Hezbollah and the diminished threat from Syria have further reduced near-to-medium-term risks. Israeli military actions in Iran in 2024 are seen as strategically advantageous and indicative of an awareness of Iran’s deterrent capabilities.
Fitch Ratings projects Israel’s central government cash budget deficit to drop to 5.7% of GDP in 2025, down from 6.8% in 2024. This improvement is attributed to a rise in revenue and reduced military spending.
The newly adopted 2025 budget focuses on revenue generation through key measures, including a 1 percentage point VAT increase, a freeze on tax indexation, and various tax hikes, such as those on undisbursed dividends.
On the expenditure side, public sector wage reductions are expected to partly offset spending pressures, particularly those driven by budgetary allocations for coalition agreements and military needs.
However, Fitch’s projected 5.7% deficit exceeds the government’s target of 4.9%, primarily due to the ongoing war in Gaza, which is not fully accounted for in the 2025 budget.
The Country Ceiling for Israel is ‘AA-‘, two notches above the LTFC IDR.
“This reflects strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments,” said Fitch.
