Fitch Warns of Economic Cost of Political Stalemate Ahead of Israeli Elections
Translated & summarized from Bizportal by baba
Credit rating agency Fitch has warned that prolonged political instability in Israel following upcoming elections could negatively impact the economy. The agency maintained a negative outlook on Israel's 'A' credit rating, citing concerns over the government's ability to pass a budget and control public debt. Fitch forecasts a rising debt-to-GDP ratio, exceeding that of similarly rated countries, due to potential difficulties in deficit reduction and increased spending. Despite these warnings, Fitch still expects economic growth and resilience, acknowledging Israel's strong economic fundamentals.
The story in 6 lines · by baba
- Fitch warns prolonged political instability in Israel could harm the economy and hinder budget passage.
- The agency maintained a negative outlook on Israel's 'A' credit rating, citing deficit and debt concerns.
- Fitch forecasts Israel's debt-to-GDP ratio to increase significantly by 2028.
- Polls suggest no clear majority, raising fears of a lengthy caretaker government period.
- Despite concerns, Fitch still expects Israeli economic growth and resilience.
- Fitch is the only major rating agency with a negative outlook on Israel.
Credit rating agency Fitch has issued a warning regarding the potential economic consequences of political instability in Israel, with elections scheduled in two weeks. The agency is concerned not only about who will form the next government but also about the possibility of prolonged governmental paralysis, potentially leading to further elections. Fitch stated that extended political uncertainty will make it harder to pass a budget, control spending, and curb the rise in public debt. In its latest regional review, Fitch maintained a negative outlook on Israel's credit rating, which currently stands at A. This is not a new decision but a continuation of warnings issued in recent months. Fitch is the only one of the three major credit rating agencies to maintain a negative outlook for Israel, with Moody's and S&P having revised their outlooks to stable. The primary concern is that a caretaker government may be unable to address the deficit effectively. Fitch noted that current polling does not indicate a clear majority for either political bloc, suggesting the possibility of a caretaker government serving for months. The economic implications stem from the difficulty in making crucial policy decisions, such as managing high defense expenditures, debt interest payments, and deficit reduction, which require budget cuts or revenue increases. Fitch previously warned in March that a failure to implement deficit-reduction measures post-election could lead to a continued increase in the debt-to-GDP ratio. The agency projected that Israel's debt servicing costs could reach approximately 9.4% of broad government revenue by 2027, a high figure compared to similarly rated countries. While the Israeli Ministry of Finance reports a current deficit of 3.2% of GDP, Fitch's broader assessment forecasts the general government deficit to reach 7.5% this year, decreasing to 5.1% by 2028. Fitch's analysis considers the entire government on an accrual basis, differing from the Finance Ministry's cash-flow-based budget deficit. The agency anticipates the debt-to-GDP ratio to rise from 68.5% in 2025 to 72.1% by 2028, significantly higher than the median of less than 58% for A-rated countries. Despite these concerns, Fitch does not foresee an immediate downgrade, acknowledging Israel's diversified economy, strong tech sector, high foreign exchange reserves, and access to capital markets. However, a growing debt burden and increased borrowing needs make Israel more sensitive to interest rates and risk premiums demanded by investors. Fitch forecasts Israeli economic growth of 3.2% this year, 3.5% next year, and 3% in 2028, also expecting a continued current account surplus and highlighting the economy's resilience to security shocks.
