Global credit rating downgrades signal Israeli economy in free fall

In further evidence of the Israeli economy creaking under the strain of its ongoing military onslaught on Gaza, Fitch Ratings has downgraded Israel’s credit rating from ‘A+’ to ‘A’ with a negative outlook. The move marks the final blow in a series of downgrades by major credit rating agencies since the Gaza onslaught began, following similar actions by Moody’s and S&P Global Ratings.

Only four months ago, Fitch kept Israel’s A+ credit rating, in spite of an uncertain economic outlook. Fitch’s April assessment however warned that the risk of a ratings downgrade, similar to that dealt by Moody’s, has not been completely removed.

Read: Moody’s downgrades rating of Israel’s 5 largest banks

Fitch’s decision, announced late Monday night, cites the “impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts” as key factors driving the downgrade. In a stark assessment of Israel’s military campaign, Fitch states that “the conflict in Gaza could last well into 2025.” The evaluation of the credit rating firm contradicts repeated Israeli claims since the start of its aggression that it is close to crushing Hamas.

The rating agency projects major deterioration in Israel’s public finances, forecasting a central government budget deficit of 7.8 per cent of GDP in 2024, up from 4.1 per cent in 2023. This fiscal decline is attributed to outlays related to military operations, economic damage mitigation, and relocation expenses for residents in northern Israel. Fitch anticipates that Israel’s debt-to-GDP ratio will rise to 70 per cent in 2024 and further to 72 per cent in 2025, surpassing the 71 per cent peak observed during the COVID-19 pandemic.

Read: Ex-PM Bennett urges Israelis not to leave as economy struggles

Fitch’s report also highlights the broader geopolitical risks facing Israel. It noted heightened tensions with Iran and its allies, including recent escalation involving Hezbollah and the Houthis. The agency warns that an escalation of these conflicts could “further damage Israel’s credit profile.”

The economic impact of the Gaza operation has been severe, with Fitch pointing to disruptions in production, particularly in border areas, as well as in tourism and construction sectors. The agency notes that while Israel has demobilised most of its reservists, reducing the immediate impact on the workforce, it expects the government to permanently increase military spending by close to 1.5 per cent of GDP compared to pre-7 October levels.

In response to the downgrade, far-right Israeli Finance Minister Bezalel Smotrich described the move as “expected”, citing Israel’s engagement in “its longest and most costly existential war, fought on multiple fronts for almost a year.”

The Fitch downgrade will be seen as another sign of the mounting economic challenges facing Israel as it executes what many say is a geocidal campaign in Gaza. The apartheid state is currently under investigation by the International Court of Justice (ICJ) for possible genocide.