Fitch Ratings downgraded Israel’s credit rating from A+ to A on Monday, with a “negative” country outlook classification amid ongoing regional conflict.
“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.”
Fitch is projecting Israel’s budget deficit to hit 7.8 percent of GDP this year, up from 4.1 percent in 2023, citing large military expenses and relocation of people living in the northern part of the country.
While the deficit is projected to slow down to 4.6 percent in 2025, Fitch warns that this number could be higher if the ongoing war spills over into next year.
In addition to the high budget deficit, Israel is projected to continue seeing a high debt-to-GDP ratio at 70 percent this year and 72 percent in the next. Debt is expected to trend upward even after 2025 in the event of higher permanent military spending and uncertain macroeconomic trends.
“Israel’s debt is higher than the forecast ‘A' peer median of 55 percent for 2025,” the report noted. Fitch also expects World Bank Governance Indicators for Israel “likely to deteriorate,” adding more pressure on the country’s credit profile.
However, “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.”
Israel’s Economy in 2024
In an April report, S&P Global also lowered Israel’s long-term ratings from A+ to AA- due to “heightened geopolitical risk.”S&P predicted that a wider regional conflict would be avoided. However, it foresaw the Israel-Hamas war to continue throughout this year, plus a “regular exchange of fire” with Hezbollah at Israel’s northern border.
The organization said it assumed no significant direct confrontation between Iran and Israel.
Under these conditions, Israel’s growth rate is expected to slump from 2 percent last year to 0.5 percent in 2024.
While some investors were hesitant to put their funds into the country, others boosted their stakes due to high-quality firms and appealing valuations, the report stated.
Private funding in the country’s tech sector rose by 31 percent in the first half compared to the same period last year, with $5.1 billion raised by local companies.
The second quarter numbers were “particularly strong,” with funding jumping from $1.8 billion in Q1 to $3.3 billion in Q2. Over half of the private funding went into the cybersecurity sector.
“This growth underscores the confidence in Israeli tech innovation but should not obscure the challenges of raising capital and growing companies across funding stages,” said Yariv Lotan, vice president of Digital Products and Data at Startup Nation Central.
On Aug. 9, the United States, Qatar, and Egypt issued a joint statement, calling for a cease-fire agreement.
