Fitch: Ceasefire could reduce fiscal risks

International credit rating agency Fitch Ratings today released an update on the credit profile of the State of Israel following the ceasefire agreement with Lebanon. “A permanent de-escalation of the armed conflict between Israel and Hezbollah as a result of the 60-day ceasefire that began on November 27 could help limit the pressure on Israel’s fiscal indicators.” Fitch stated, “In our view, any ceasefire is likely to be fragile, and the prospects for an imminent ceasefire in Gaza remain low.”

In August of this year, Fitch downgraded Israel’s sovereign rating from ‘A+’ to ‘A’ with a negative outlook. Fitch’s rating is similar to S&P’s and one notch above Moody’s, which rates Israel Baa1.

“If the ceasefire with Hezbollah holds, fiscal risks will be reduced, but developments with the Gaza Strip and Iran will still play a key role in determining Israel’s fiscal and economic trajectory,” Fitch said. The latest information says. “We believe that the war in Gaza will continue, albeit at varying levels of intensity, until 2025, as spending on immediate military needs continues to increase and This means disruption to production, tourism and construction.”

Regarding the fiscal deficit, Fitch said, “Fitch currently projects the fiscal deficit to be approximately 7.8% of GDP in 2024 and 5.2% in 2025, compared to 7.8% of GDP in 2025, respectively, at the time of the August review. % and 4.6%, although the escalation in the conflict with Hezbollah was not included in our base assumptions in August, related costs were partially offset by strong earnings performance in the second half of the year. I did. The 2025 budget targets a deficit of 4.3% of GDP, but our master plan includes more military spending than the government envisions.

“In line with our August assumptions, Fitch forecasts that debt/GDP will rise from a recent low of 60.5% in 2022 to nearly 72% in 2025, which puts us in the ‘A’ category. This would be higher than the median of 58% for sovereigns. . ”

The latest projections from the Israel Banking Research Authority show that the budget deficit will be 7.2% of GDP in 2024 and 4.9% in 2025. Bank of Israel researchers predict that government debt will rise to about 68% of GDP in 2024; 69% of GDP in 2025.

According to Fitch, “Israel’s medium-term fiscal outlook remains subject to a high degree of uncertainty. Depending on whether military spending is maintained, there is a risk that the fiscal deficit will exceed debt stability levels beyond 2026. Recent high-level coalition priorities and the status of Israel’s economic recovery.

“If the ceasefire holds, it would remove a major potential factor for escalation of conflict between Israel and Iran, a close ally of Hezbollah. However, regional violence involving Iran would significantly escalate. The risks remain significant and the new administration’s attitude remains important.”The Trump administration’s policy toward Iran is likely to impact Israel and its regional policy, and Fitch has previously noted that a significant escalation of regional conflicts is likely to occur in many parts of the Middle East. He said that this could have a credit impact on the country’s sovereigns. impact on global oil prices,” the update concludes.

Moody’s also cautiously welcomed the cease-fire in its own memo, but Israel has yet to present a credible plan for the Gaza Strip that would ensure long-term stability, leading to an escalation of hostilities with Iran. He said risks still remain. Moody’s also said external risks may have decreased as the government moves forward with controversial policies that Moody’s views as exacerbating domestic tensions and unpopular moves such as draft exemption for Haredim. However, he said domestic political risks still remain.

Published by Globes, Israel Business News – en.globes.co.il – on November 28, 2024.

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