Fitch Warns of New Israeli Elections in April 2027

Credit rating agency Fitch estimates that the Israeli Knesset will be dissolved in January, leading to new elections in April 2027. The agency warns this could result in political paralysis, a prolonged interim government, and difficulties in approving the state budget. Fitch's forecast suggests that after the current government loses its majority, President would likely task Benjamin Netanyahu with forming a new government, giving him 28 days, potentially extendable by another 14. If Netanyahu fails, Gadi Eisenkot might be given 28 days to attempt coalition building. Another Knesset member could be tasked if at least 61 MKs request it.

Fitch assesses a significant risk that a stable coalition with a 61-seat majority will not be formed. Should coalition negotiations fail, the Knesset could dissolve, triggering new elections while the outgoing government continues as an interim administration. While Fitch does not rule out a broad coalition led by Netanyahu and Eisenkot excluding ultra-Orthodox parties, this is not their base scenario. "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, noting this timeline better accommodates budget approval than March elections.

A primary consequence of this political instability is the possibility of Israel entering 2027 without an approved state budget. Fitch believes the outgoing coalition, having lost its parliamentary majority, will struggle to pass the budget before new elections. The agency recalls that failure to approve the budget by the legal deadline can lead to automatic Knesset dissolution. However, the 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. These rules cap monthly spending at one-twelfth of the previous year's ceiling or permitted expenditure, whichever is lower, adjusted for average population growth. Fitch noted that in 2026, permitted spending exceeded the 699 billion shekel ceiling by approximately 32 billion shekels. Therefore, without a new 2027 budget, monthly spending would be based on the 699 billion shekel ceiling, plus an adjustment for an estimated 1.5% annual population growth.

The agency points out that Israel has experienced prolonged periods without an approved budget, such as in 2020 (a full year) and 2021 (until November), and partially in 2023 (until May). While operating without an approved budget might limit government spending and reduce the deficit in the short term, Fitch emphasizes this would not represent genuine fiscal improvement but rather a consequence of political paralysis. The agency anticipates that the government debt-to-GDP ratio will continue to rise moderately, a key factor in Israel's current 'A' credit rating outlook.