In Another Warning, Israel’s Credit Rating Reduced and Economic Outlook Deemed Negative
Experts say that Israel’s credit rating would have already plunged lower were it not for the country’s resilient high-tech sector
The American credit ratings agency Fitch announced it was downgrading Israel’s credit rating from A+ to A late on Monday, saying the prolonged Israel-Hamas war had heightened risks, meriting a negative outlook for the Israeli economy.
Israel’s credit ratings have been on shaky ground for over a year.
The surprise is that it had taken so long for the rating to go down.
“The surprise is that it had taken so long for the rating to go down,” Professor Benjamin Bental, a researcher at the Taub Center for Social Policy Studies and chair of the center’s economics policy program, told The Media Line.
When Fitch announced its new rating, the two other significant rating agencies, Moody’s and S&P, had already downgraded their ratings for Israel.
These ratings reflect what the markets have been reflecting for a while now, acting as a traffic sign that illustrates the situation.
“These ratings reflect what the markets have been reflecting for a while now, acting as a traffic sign that illustrates the situation,” Bental said.
National credit ratings assess a government’s credibility regarding its financial obligations and debt. The lower the rating, the more difficult it is for a country to borrow money. Last year, several agencies warned Israel that its ratings could be at risk because of a government plan to dramatically reform the judicial system that caused widespread domestic unrest. These warnings came months before the war, which erupted on October 7, 2023, with a surprise Hamas offensive against Israel.
“The Israeli economy is resilient and functioning well,” Israeli Prime Minister Benjamin Netanyahu said in a statement on Tuesday. “The ratings will rise again when we win the war—and we will win it.”
Finance Minister Bezalel Smotrich also downplayed the Fitch decision.
“Israel is in the midst of an existential war, the longest and most expensive in its history,” he said in a statement. “A war that is being waged on several fronts simultaneously and has been going on for almost a year. The downgrade following the war and the geopolitical risks it creates is natural. Israel’s economy is strong, and we navigate it correctly and responsibly. The economic indicators indicate the robustness of the economy and the high confidence we have in the markets.”
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In its report, Fitch referred to the protracted conflict, which it estimated could continue well into 2025.
“The war is very exhausting because of its length but also because of the shock waves it caused and the fact that much of it is happening on Israeli territory, not like in previous wars,” Bental said. “It is causing massive expenditure. The war began when the Israeli economy was in an excellent state, so that the damage that has been caused so far, while significant, is still containable.”
Experts estimate the cost of the war will be around $70 billion. That number is based on the assumption that the war will continue until 2025, with the conflict remaining at its current intensity until that point. But those assumptions are up for debate. In the past two weeks, Israel has been on high alert for a possible attack from Iran and an intensification of fighting with the Lebanese-based Hezbollah militia. Such escalations could lead to a wider regional conflict and even more trouble for the Israeli economy.
Fears of a wider conflict have caused the Israeli currency, the shekel, to weaken against the US dollar in recent weeks. The Tel Aviv Stock Exchange has also fluctuated, with investors uncertain about the future. Government inaction has fueled that uncertainty.
The problem with this government is that it doesn’t do anything right in any parameter that relates to the budget and the financial planning regarding the war. The main consequence of not having a plan is the lack of the ability to remove uncertainty about the coming years. The government is not projecting anything about the horizon that enables any sort of planning.
“The problem with this government is that it doesn’t do anything right in any parameter that relates to the budget and the financial planning regarding the war,” Bental said. “The main consequence of not having a plan is the lack of the ability to remove uncertainty about the coming years. The government is not projecting anything about the horizon that enables any sort of planning.”
Economies, investors, stock markets, and credit rating companies are all averse to uncertainty.
Since the conflict broke out, Smotrich and Netanyahu have been criticized for their handling of the war’s economic aspect. Preliminary discussions on next year’s state budget, which should be well underway at this point, have stalled.
“The war brought a lot of unplanned expenses, and the finance minister is not promoting a budget for the next year,” Dr. Gali Ingber, head of finance studies at Rishon LeZion’s College of Management Academic Studies, told The Media Line. “It doesn’t seem like the government is disturbed by the huge deficit that has been created as a result of the war and the tens of billions of shekels that will need to be added—not only to next year’s budget but for years to come.”
Ingber said that the government will have to decide which budgets to cut and which taxes to raise to cover the costs. These are highly unpopular moves that the government, already unpopular due to its handling of the security crisis, is apparently hesitant to undertake.
The Fitch report projects that Israel’s budget deficit will be 7.8% of its gross domestic product in 2024 and that its debt will remain above 70% of its GDP.
Smotrich and Netanyahu have said that Israel’s economy will bounce back after the war, but the potential for escalation or a protracted war makes that possibility less likely.
It’s not that trivial. To raise the credit ratings back up, the companies need to be able to reach the conclusion that the economy is recovering and that there is a comprehensive plan on how to make budget cuts, reduce the deficit, cut expenditure, and reduce the rate of debt as part of the GDP back to around 60%.
“It’s not that trivial,” Ingber said. “To raise the credit ratings back up, the companies need to be able to reach the conclusion that the economy is recovering and that there is a comprehensive plan on how to make budget cuts, reduce the deficit, cut expenditure, and reduce the rate of debt as part of the GDP back to around 60%.”
Countries with A credit ratings usually have a debt-to-GDP ratio of 55%.
Both Ingber and Bental pointed to Israel’s strong economic foundations as the factors preventing the war from causing an economic collapse. According to Israel’s Central Bureau of Statistics, unemployment remains low at 3.2%. Israel also has a satisfactory number of available jobs, slightly up from prewar levels.
Israel’s high-tech sector, a major contributor to the strength of the economy, has also proved to be resilient. A recent report issued by the Israel Innovation Authority dubbed the high-tech sector “the shock absorber of the Israeli economy.” While foreign investment took a hit during the judicial reform crisis and at the beginning of the war, a couple of major deals in the current quarter have stabilized high-tech sector investment rates.
Thanks to these solid foundations, the experts said, Israel’s credit rating was reduced only gradually and after a long period of time.
“There is still faith in the great prowess of Israeli high tech and the immense talent that the country harnesses,” Bental said. “Israel’s credit ratings should have been much lower by now.”
Should the threat of a greater war materialize, the high-tech sector may no longer be able to shield the economy. Regardless of future escalation, managing the economic situation is now in the government’s hands.
