Real de-escalation with Hezbollah could limit pressure on Israel's finances - Fitch

Coalition priorities could keep Israel's deficit above a debt-stabilizing level in 2026 and beyond, the agency said.

By EVE YOUNG NOVEMBER 28, 2024 13:38 Updated: NOVEMBER 28, 2024 14:33

People walk past the headquarters of Fitch Ratings in New York, February 6, 2013. (photo credit: BRENDAN MCDERMID/REUTERS)

Israel's ceasefire in Lebanon could help limit strains on Israel's credit profile, Big Three rating agency Fitch Ratings said on Thursday.

While the company said it expects that "the ceasefire is likely to be fragile, and prospects for an imminent ceasefire in Gaza remain poor," it said that a durable de-escalation, potentially resulting from the ceasefire, could "limit pressure on Israel's public finance metrics."

Escalation with Hezbollah since August has put "pressure on Israel's fiscal metrics through the cost of reservists mobilized on the northern border, use of military supplies, compensation payments for affected residents, and lower economic activity."

If the ceasefire is sustained, it will reduce fiscal risks, but "developments in Gaza and with Iran will still play an important role in determining Israel’s fiscal and economic trajectory," the company added.

"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," the company said.

People carry Hezbollah flags at a damaged site in Beirut's southern suburbs, after a ceasefire between Israel and Hezbollah took effect, in Beirut, Lebanon November 27, 2024. (credit: REUTERS/Thaier Al-Sudani TPX IMAGES OF THE DAY)

"The attitude of the new Trump administration towards Iran is likely to have an impact on Israel and its regional policy," it added.

Fitch forecasts Israel's budget deficit rising in 2025

Fitch predicted Thursday that Israel's budget deficit will stand at around 7.8% of gross domestic product in 2024, the same as its prediction in its August review.

The agency's prediction for the 2025 deficit, however, was 5.2% of GDP, up from the agency's August prediction of 4.6%.

"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 2H24," the agency explained,

Fitch's assumption is that there will be more military spending than the Israeli government's 2025 budget bill allows for.

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"Debt/GDP will rise close to 72% in 2025 from a recent low of 60.5% in 2022," the company forecasted. "This would be above the median for sovereigns in the ‘A’ category, of 58%," the company said, highlighting that they expect Israel's debt-to-GDP ratio to remain higher than other countries with the same rating.

The agency pointed to the government's priorities as one of the factors that will impact the budget deficit - possibly keeping this above a "debt-stabilizing level in 2026 and beyond."

The deficit will depend on coalition priorities, as well as military spending levels and the "shape of Israel's economic recovery."