Fitch Warns of Prolonged Uncertainty Following Israeli Election Results

Credit rating agency Fitch has warned of continued uncertainty in Israel stemming from the recent election results. The agency stated on Friday that the outcome indicates a risk of prolonged political instability. Israel's current credit rating is 'A' with a negative outlook, a rating Fitch believes aligns with a near-term future characterized by a transitional government or a coalition lacking a Knesset majority.

Fitch elaborated that if coalition negotiations fail, the Knesset could be dissolved, leading to new elections within 90 days. During this period, the outgoing government would continue as a caretaker administration. This situation would necessitate reliance on a "continuity budget," making it difficult to reduce government debt. The agency does not anticipate a new budget being approved by the Knesset during this time, as automatic budget mechanisms would significantly restrict government spending.

Should the 2027 budget not be approved, monthly spending would be capped at 699 billion shekels, adjusted for an estimated annual population growth of 1.5%. Fitch indicated that this budget mechanism would reflect political paralysis and not improve public finances. The agency expects the government debt-to-GDP ratio to continue a moderate rise, remaining a key factor supporting the negative outlook for Israel.

Fitch projected that the most likely scenario involves the dissolution of the Knesset in late January, with new elections held in early April. The agency recalled a previous period of political uncertainty between 2020 and 2021, during which Israel operated without an approved budget, managing with a budget under the COVID-19 pandemic.

Fitch previously downgraded Israel's credit rating from 'A+' to 'A' with a negative outlook in 2024, amidst the Gaza war. At that time, the agency cited the ongoing conflict, escalating geopolitical risks, and military operations on multiple fronts as factors impacting the country's economic situation. Approximately two weeks ago, Fitch confirmed that its negative outlook remained unchanged.