Fitch: Ceasefire could reduce fiscal risks

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Following its downgrade of Israel's rating in August, Fitch has issued an update assessing the impact of the ceasefire with Lebanon, expressing very cautious optimism.

International credit rating company Fitch ratings released an update today of the State of Israel’s credit profile, following the ceasefire agreement with Lebanon. "A durable de-escalation of armed conflict between Israel and Hezbollah - potentially as a result of the 60-day ceasefire that began on 27 November - could help to limit pressure on Israel’s public finance metrics," Fitch states, but adds, "In our view, the ceasefire is likely to be fragile, and prospects for an imminent ceasefire in Gaza remain poor."

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

"The ceasefire with Hezbollah, if sustained, would reduce fiscal risks, but developments in Gaza and with Iran will still play an important role in determining Israel’s fiscal and economic trajectory," Fitch’s update states. "We believe the war in Gaza will continue into 2025, albeit at various levels of intensity. This implies continued elevated spending on immediate military needs, and disruption to production in the border areas, as well as to tourism and construction."

As for the fiscal deficit, Fitch states, "Fitch currently projects a budget deficit of about 7.8% of GDP in 2024 and 5.2% in 2025, compared with our forecasts of 7.8% and 4.6%, respectively, at the time of our August review. The escalation of conflict with Hezbollah did not form part of our baseline assumptions in August, but the associated costs have been partly offset by robust revenue performance in the second half of 2024, and we believe some spending will be recognized under the budget for 2025. The 2025 budget bill aims for a deficit of 4.3% of GDP, but our baseline includes more military spending than the government assumes.

"Fitch forecasts that debt/GDP will rise close to 72% in 2025 from a recent low of 60.5% in 2022, in line with our August assumption. This would be above the median for sovereigns in the ‘A’ category, of 58%."

The latest forecast from the Bank of Israel Research Department is that the fiscal deficit will be 7.2% of GDP in 2024 and 4.9% in 2025. The Bank of Israel researchers expect government debt to rise to about 68% of GDP in 2024, and about 69% of GDP in 2025.

According to Fitch, "Israel’s medium-term fiscal prospects remain subject to a high degree of uncertainty. There is a risk that the budget deficit could remain above a debt-stabilizing level in 2026 and beyond, depending on whether spending on the military is sustained at recent high levels; coalition priorities; and the shape of Israel’s economic recovery.

"The ceasefire, if sustained, will remove a key potential driver for increased conflict between Israel and Iran, a close ally of Hezbollah. However, the risk of a major escalation in regional violence that involves Iran remains significant, and the attitude of the new Trump administration towards Iran is likely to have an impact on Israel and its regional policy. Fitch has previously stated that a significant escalation of regional conflict could have credit repercussions for a number of sovereigns in the Middle East, and may affect global oil prices," the update concludes.

Published by Globes, Israel business news - en.globes.co.il - on November 28, 2024.

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