Fitch Warns of Political Instability Impacting Israel's Deficit Reduction
Translated & summarized from Walla by baba
Credit rating agency Fitch has affirmed Israel's credit rating but warned of potential prolonged political instability following the upcoming elections, which could hinder deficit reduction. The agency predicts a close election race, possibly leading to a caretaker government for months. Fitch forecasts the government deficit to reach 7.5% of GDP this year, with public debt expected to rise to 72.1% by 2028, though it also acknowledged Israel's economic strengths. The next review is set for March 2027.
The story in 6 lines · by baba
- Fitch warns Israel faces prolonged political instability post-election, potentially delaying deficit reduction.
- Neither political bloc has a clear majority in polls, risking a lengthy caretaker government period.
- The government deficit is projected at 7.5% of GDP this year, with public debt expected to rise.
- High defense spending is a major factor contributing to the deficit and debt concerns.
- Fitch acknowledged Israel's economic strengths, including diversification and resilience.
- The next credit rating review is scheduled for late March 2027.
Credit rating agency Fitch has affirmed Israel's credit rating but issued a new warning regarding potential prolonged political instability following the upcoming elections. The agency noted that neither political bloc currently holds a clear majority in polls, suggesting Israel could face an extended period with a caretaker government for months, or even face further elections. This instability, coupled with rising public debt and significant defense expenditures, could hinder the government's ability to make decisions necessary to reduce the deficit.
In its report, which covers Middle Eastern and North African countries, Fitch dedicated a section to Israel. The country's credit rating remains at the sixth-highest level, with a negative outlook indicating a potential future downgrade. The report, released yesterday, outlines Fitch's concerns about Israel's economic, security, and political situation.
Fitch specifically highlighted the upcoming Knesset elections on October 27, predicting a close race with no clear indication of either bloc securing the 61 seats needed to form a government. The agency estimates the current government might continue as a caretaker administration for several months until a new government is formed or new elections are called. Fitch recalled Israel's history of unstable governments struggling to make decisions and warned that the current political climate could impede deficit reduction and curb rising debt.
The agency projects the government deficit to reach 7.5% of GDP this year, compared to 6.5% in 2025 and 9% in 2024, primarily due to high defense spending. While the deficit is expected to decrease to 6.6% next year and 5.1% by 2028, largely due to anticipated reductions in military spending, Fitch noted that higher-than-expected government revenue might result in a lower deficit than projected. This caveat is significant given the Ministry of Finance's report of a 3.2% deficit for the 12 months ending in September, though Fitch's calculation method differs by including projected figures for the full year.
Fitch also expressed concern over the continued rise in public debt, forecasting it to increase from 68.5% of GDP in 2025 to 72.1% by 2028. This figure is notably higher than the median debt of 58% of GDP expected for countries with similar credit ratings by 2028. The agency warned that defense spending exceeding expectations could further increase Israel's debt.
Despite these concerns, Fitch acknowledged Israel's economic strengths, including a diversified economy, resilience to crises, and high-value industries. The economy is projected to grow by 3.2% this year and 3.5% in 2025, with a current account surplus expected to continue. In security, Fitch noted an improvement due to the weakening of Iran-backed organizations in the region, though renewed escalation could negatively impact the economy and lead to a downgrade. Conversely, a reduction in debt, easing security conflicts, decreased political risks, or improved government functioning could lead to a revision of the outlook from negative to stable. The next credit rating review is scheduled for late March 2027.
