Fitch Predicts Israeli Knesset Dissolution, April 2027 Elections

Credit rating agency Fitch has issued a stark forecast for Israel, predicting the Knesset's dissolution in January and new elections in April 2027. The agency warns of potential political paralysis, a prolonged interim government, and difficulties in approving the state budget.

According to Fitch's assessment, the President would likely task Benjamin Netanyahu with forming a government, granting him 28 days with a possible 14-day extension. If Netanyahu fails, Gadi Eisenkot might receive 28 days to attempt coalition building. The mandate could then pass to another Knesset member if at least 61 lawmakers request it.

Fitch highlights the risk of an unstable coalition lacking a 61-seat majority. Should coalition negotiations fail, the Knesset could dissolve, leading to new elections while the outgoing government continues as an interim administration. While Fitch doesn't rule out a broad coalition without ultra-Orthodox parties, it considers this scenario less likely.

"The most likely scenario, in our assessment, is the dissolution of the Knesset in early January and new elections in early April," the agency stated. This timeline, Fitch explains, is more conducive to budget approval than holding elections in March.

A significant consequence of this political instability is the possibility of Israel entering 2027 without an approved budget. Fitch believes the current coalition, having lost its parliamentary majority, will struggle to pass the budget before new elections. The agency reminds that failing to approve the state budget by the legal deadline automatically dissolves the Knesset, though the final deadline can be extended under certain circumstances.

Fitch cautions that the political situation could lead to a period of unstable and interim governments, reminiscent of 2019-2022 when Israel held five elections. Without an approved 2027 budget, the government would operate under continuity budget rules, limiting monthly expenditures. This limitation, based on the previous year's spending ceiling adjusted for population growth, could significantly curb government spending and reduce the deficit in the short term. However, Fitch emphasizes this deficit reduction would stem from political paralysis, not fiscal improvement, and expects the government debt-to-GDP ratio to continue a moderate rise, a key factor in Israel's current 'A' credit rating.