Fitch removes Israel from 'rating watch negative', keeps A+ rating

Fitch Ratings maintained Israel's 'A+' sovereign credit rating on Tuesday and removed the country from "rating watch negative" (RWN) but said Israel's war against Islamist group Hamas in Gaza remained a risk. At the outset of the conflict in October, Fitch placed Israel's sovereign debt rating on negative watch and warned a major escalation of the conflict could result in a downgrade.

"Geopolitical risks associated with the war in Gaza remain elevated and escalation risks remain present, but Fitch believes the risks to the credit profile have broadened and their impact may take longer to assess, so has removed the RWN on Israel's 'A+' rating," Fitch said. However, the risk of a ratings downgrade, similar to that dealt by Moody's in February, has not been completely removed.

Fitch said its negative ratings' outlook for Israel "reflects the combination of uncertainties around the fiscal trajectory and the war's duration and intensity, including the risk of regional escalation." Fitch director Cedric Julien Berry said the agency expected a near-term jump in the debt-to-GDP ratio and persistently higher military spending amid Israel's fractious domestic politics and an uncertain economic outlook, which could limit Israel's ability to bring down debt in the future.

"We expect the war to continue in the second quarter with a risk of intense operations continuing beyond. This implies continued high spending on immediate military needs," it said. Fitch said that while it was not its base case, there was a risk the war could expand beyond Hamas in Gaza to Hezbollah in Lebanon, to Iranian groups or elsewhere in the region.

"Such large-scale escalation ... could result in significant additional military spending, destruction of infrastructure, sustained change in consumer and investment sentiment, and thus lead to a large deterioration of Israel's credit metrics," Fitch said. A suspected Israeli airstrike on Monday killed two of Iran's top generals and five other military advisers at the Iranian embassy compound in Damascus. Iran has vowed revenge.

The war in Gaza was sparked by Hamas' shock attack on Israel on Oct. 7. Israeli lawmakers approved an amended 2024 state budget last month that added tens of billions of shekels of spending to finance the war and compensate affected businesses and households. Fitch expects a budget deficit of 6.8% of gross domestic product this year, slightly higher than the 6.6% target, and 3.9% in 2025. The deficit was 5.6% in February over the prior 12 months. Fitch sees public debt at 65.7% of GDP in 2024 and 67% next year.

Finance Minister Bezalel Smotrich said Fitch keeping the rating at A+ during the war was an "expression of confidence in the Israeli economy and the economic policy we are leading." In an X post, Prime Minister Benjamin Netanyahu said that once Israel defeats Hamas, "all the ratings will rise."

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