Credit Agency Fitch Warns Political Stalemate Threatens Israel's Rating

International credit rating agency Fitch has warned that the current political deadlock in Israel, following the recent Knesset elections, poses a significant risk of prolonged political uncertainty and a lengthy period of a caretaker government. Fitch stated that the political system's impasse and the real risk of lacking a stable parliamentary majority are consistent with Israel's current credit rating of 'A' with a negative outlook.

The election results show the Likud party remaining the largest faction with approximately 27 seats, but Prime Minister Benjamin Netanyahu's bloc secured only 53 seats, falling short of the 61 needed to form a coalition. The bloc led by Gadi Eisenkot garnered 48 seats, while Arab parties hold 19 seats. Voter turnout was high at 78%, compared to 71% in the 2022 elections.

Fitch highlighted the complex constitutional process ahead. According to Basic Law: The Government, the President will likely first task Netanyahu with forming a government for 28 days, with a possible 14-day extension. If he fails, the mandate would pass to Eisenkot for 28 days. Should that also fail, the President could assign the task to another Knesset member if at least 61 members explicitly request it.

Analysts at Fitch assess the likelihood of forming a stable 61-seat coalition as low. While a broad coalition uniting Netanyahu's and Eisenkot's blocs without the ultra-Orthodox parties is theoretically possible, it is not considered the base scenario. If coalition talks fail, the Knesset would be dissolved, leading to new elections within 90 days, with the outgoing government continuing as a caretaker administration.

Fitch analysts anticipate that the most probable scenario involves the Knesset's dissolution in early January and new elections in early April. This timeline aligns with budget mechanisms, as failure to approve the state budget by March 31 automatically dissolves the Knesset. The absence of an approved budget for 2027 before new elections is considered highly unlikely. Without an approved budget, the government would be restricted to monthly expenditures based on the previous year's ceiling adjusted for population growth. This forced austerity is expected to limit government spending and potentially reduce the fiscal deficit in the short term, though Fitch emphasizes this is due to political paralysis, not fiscal responsibility. The agency expects Israel's debt-to-GDP ratio to continue a moderate rise, a key factor maintaining the negative outlook on the country's credit rating.