Fitch Removes Negative Watch on Israel's Credit Rating But Forecasts Negative Outlook

Fitch, the renowned international credit rating company, has stirred the financial world by placing the credit rating of the State of Israel, which currently stands at +A, under "Rating Watch Negative." This announcement follows a shift in the perception of geopolitical risk in the wake of the "Iron Swords" war.

In essence, Fitch intends to closely monitor security developments in the region over the next six months. If a significant deterioration in the security situation occurs during this period, the company may take a negative rating action. Conversely, if the anticipated deterioration does not materialize, the "negative tracking" will be lifted.

CPA Yaheli Rotenberg, the Accountant General at the Treasury, clarified that this move signifies a worsened rating forecast, suggesting a possible downgrade should the security situation deteriorate further, especially in the northern sector. However, Fitch still recognizes Israel's economy as strong and stable, implying that a downgrade is not currently warranted.

Fitch's announcement underscores concerns that the ongoing conflict, particularly if it escalates and involves multiple actors over an extended period, could negatively impact fiscal data. While not the most likely scenario, such an escalation could lead to increased government spending, reduced state revenues, damage to consumer and investor sentiment, and a decline in Israel's credit ratings.

The company's apprehension about the conflict expanding has risen significantly due to frequent cross-border exchanges of fire, notably on the Lebanese border. Furthermore, statements from high-ranking officials in Iran and Hezbollah have contributed to this unease. It's important to note that an expanded conflict would entail substantial costs for Iran and Hezbollah in light of warnings from Israel and the United States.

Fitch highlights Israel's dynamic economy, high added value, readiness for military conflict, historical resilience to this type of situation, and strong fiscal indicators. As a result, a relatively short conflict primarily centered on the Gaza Strip is unlikely to significantly affect Israel's credit rating.

Meanwhile, economists from the credit rating company Standard & Poor's (the third of the three agencies rating Israel) are expected to visit Israel in the coming week. They have scheduled meetings with senior officials in the country's economic leadership, including the Minister of Finance, the Governor of the Bank of Israel, and other key figures. Following these meetings, the company is anticipated to release a special report on Israel's economy.