Fitch also maintained a negative outlook on Israel’s future credit rating, suggesting that further downgrades could occur if the situation deteriorates.
The downgrade reflects the significant impact of the protracted war with Gaza, which has resulted in the deaths of over 39,000 Palestinians, mostly women and children.
Fitch noted that the continuation of the conflict, along with elevated geopolitical risks and military operations across multiple fronts, contributed to this decision. The agency projects a budget deficit of 7.8 percent of Israel's gross domestic product (GDP) for 2024, which is expected to be driven by increased military spending and decreased economic activity.
Fitch’s negative outlook is further influenced by recent regional tensions. These include the deadly attack in Majdal Shams on July 27, which resulted in the deaths of 12 children, and Israel's recent actions such as the assassinations of a high-ranking Hezbollah military leader in Beirut, Lebanon, and the suspected Israeli assassination of Hamas political leader Ismail Haniyeh in Tehran, Iran. These events have heightened regional instability and contributed to Fitch’s concerns about the conflict's potential to expand.
The agency warned that the ongoing conflict in Gaza could extend into 2025 and may even broaden to other regions. This scenario could lead to increased military expenditures, further infrastructure damage and continued strain on economic activity and investment in Israel – all of which would only serve to exacerbate the country's fiscal challenges.
Fitch does anticipate that the budget deficit may narrow to 4.6 percent of GDP in 2025 if military spending decreases and revenue growth improves. However, this projection is contingent on the immediate resolution of the conflict. If the war persists, the deficit could remain elevated or even worsen.
Israel's debt-to-GDP ratio is projected to rise to 70 percent in 2024 and 72 percent in 2025, surpassing the previous peak of 71 percent during the pandemic. This increase in debt could continue if military spending remains high and macroeconomic uncertainties persist.
In response to Fitch’s decision, Prime Minister Benjamin Netanyahu's office emphasized the resilience of the Israeli economy, attributing the downgrade to the extraordinary circumstances of a multi-front war that Israel is currently facing. Netanyahu’s office expressed confidence that the rating would improve once the conflict is resolved favorably for Israel.
Finance Minister Bezalel Smotrich characterized the downgrade as a predictable outcome given the ongoing war and reassured that the Israeli economy remains robust. He highlighted that Israel is engaged in its longest and most expensive war to date, which has been ongoing for nearly a year.
Finance Ministry Accountant General Yali Rothenberg stressed the importance of drafting a 2025 state budget that focuses on rebuilding fiscal reserves and gradually reducing the debt-to-GDP ratio. Smotrich pledged that the government would develop a responsible budget that balances the needs of the war effort with maintaining fiscal discipline and supporting economic growth.
Economic crisis in Israel being exacerbated by ongoing conflict
Economists are warning of a potential deep economic crisis in Israel, exacerbated by the ongoing war with Hamas, extensive IDF mobilization, strained international relations, high public expenditure, and concerns about democratic governance. Despite these warnings, key economic indicators show mixed results. (Related: COUNTRY IN COLLAPSE: 46,000 Israeli businesses have shut down since October 7.)
The Tel Aviv Stock Exchange has rebounded to levels higher than before the war, with the Tel Aviv 35 index closing at 1,984.9 points on Sunday, up about 8% from pre-war levels. The shekel’s exchange rate is stable, with the American dollar at NIS 3.75 and the euro at around NIS 4.04.
Unemployment rates, though higher than before the war, have not reached crisis levels. The limited unemployment rate was 3 percent in May, and the expanded rate peaked at 10.4 percent in October but has since decreased to around five percent by April.
Overall, while challenges remain, the situation is better than during the early months of the conflict.
Watch this short video showing how Israeli Minister of Finance Bezalel Smotrich's extremism is aiding Israel's collapse.
This video is from the channel The Prisoner on Brighteon.com.
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