Fitch is Concerned Over Israel's Political and Security Instability - Credit Rating Downgrade?

 Economists from Fitch, one of the world's top three credit rating agencies, visited Israel this week to meet with senior economic officials and express significant concern over the country’s political situation and the ongoing security escalation. According to one of the officials involved in the meetings, the Fitch representatives were "really worried and negatively surprised" by the current state of affairs. This has raised concerns that the agency may bring forward its report on Israel's credit rating, potentially issuing a warning of a downgrade if the situation doesn't improve.

Fitch’s visit comes as Israel grapples with ongoing political turmoil and renewed military conflicts. The agency and Moody’s and S&P planned to release their periodic reports on Israel’s economy at the end of April. However, sources suggest that, given the mounting concerns, these reports may be released sooner, potentially in early April.

Escalating Tensions Over Political Issues

The economists' concerns primarily center on the political environment in Israel, which is perceived as destabilizing for the country's economy. Officials from Israel's economic ministries and the banking sector met with the Fitch economists to discuss these issues in person for the first time, instead of via videoconference as in previous years. Fitch’s decision to send economists to Israel reflects the gravity of the situation.

The primary concern is the ongoing war, which has reignited across multiple fronts, and the political upheaval, including legislative changes and high-level government dismissals. Rating agencies are closely watching these developments, especially the proposed dismissal of senior officials, such as Attorney General Gali Baharav-Miara and other key legal advisors to government ministries. The legal reforms and staff changes could exacerbate concerns about Israel’s governance and political stability.

Warnings of Potential Rating Downgrade

A senior Israeli official noted that while a credit rating downgrade may not happen immediately, the Fitch report is likely to include a "threat" of such a downgrade depending on how the political situation and security conflict evolve. Rating agencies are assessing not only the current state of the Israeli economy—whose performance had improved with the ceasefire two months ago—but also the long-term implications of political instability on financial institutions, government operations, and the national budget.

In recent months, Israel’s credit ratings have already been downgraded by all three major rating agencies, with Moody’s making multiple reductions. Israel’s rating has fallen to levels comparable to those of emerging markets, such as Thailand, Peru, and Kazakhstan—countries that are often considered less economically stable than Israel, which was once among the top-rated economies in the world.

Fitch, Moody’s, and S&P to Monitor Situation Closely

Fitch economists held face-to-face meetings, while economists from Moody’s and S&P are expected to conduct their sessions via videoconference due to the ongoing security risks in the region. Moody’s will hold its primary meetings on Tuesday and Wednesday, while S&P is scheduled to meet with Israeli officials mid-next week.

As international credit rating agencies closely monitor Israel’s political and security developments, the threat of further downgrades looms large, with the potential to further impact the country’s economic standing on the global stage.