Fitch downgrades Israel's credit rating amid rising West Asia tensions

Fitch Ratings has downgraded Israel's credit rating from 'A-plus' to 'A' in response to escalating geopolitical risks linked to the ongoing conflict in Gaza. The agency also maintained a negative outlook on the rating, signalling that further downgrades could be possible if the situation worsens.

The downgrade follows intense fighting that erupted on October 7 last year after a cross-border attack by the Islamist group Hamas. This conflict has resulted in significant casualties and triggered a severe humanitarian crisis. Fitch projects that the war in Gaza could extend well into 2025 and potentially widen to other regions, adding to the geopolitical instability.

Israeli Finance Minister Bezalel Smotrich responded to the downgrade on social media platform X, acknowledging that the conflict and its associated risks had led to this decision. The situation has become tenser with recent high-profile attacks, including the killing of Hamas leader Ismail Haniyeh in Iran and Hezbollah military commander Fuad Shukr in Beirut. These developments have heightened fears of a broader regional conflict.

As a result of the rising tensions, Israel's shekel fell by as much as 1.7 per cent against the dollar on Monday, and Tel Aviv's stock market ended over 1 per cent lower. Fitch highlights that the heightened regional conflict could necessitate substantial increases in military spending, leading to further economic strain. The agency estimates that military expenditures could permanently rise by about 1.5 per cent of GDP compared to pre-conflict levels, impacting public finances.

Fitch forecasts a budget deficit of 7.8 per cent of GDP for Israel in 2024 and anticipates that the national debt will stay above 70 per cent of GDP in the medium term. If military spending remains elevated and economic uncertainties persist, the country's debt could continue to rise beyond 2025.