By the editors
Many people wonder about the implications of global credit rating agencies downgrading a country’s credit rating. Below we list the implications of this for downgrading Israel’s credit rating.
Late Monday, Fitch Ratings downgraded Israel’s credit rating by one notch, from A+ to A, as the aggression on the Gaza Strip continues for its tenth month and its repercussions in the region.
Fitch said in a statement that the rating downgrade “reflects the impact of the ongoing war in Gaza, heightened geopolitical tensions and military operations on multiple fronts.”
The agency kept its outlook on the rating at negative, which means it could be lowered again.
Fitch is the latest of three ratings firms to downgrade Israeli government bonds since the start of the war on Gaza on October 7, following downgrades by Moody’s and Standard & Poor’s.
The seriousness of the economic situation
The continued and rolling credit downgrade towards the economic abyss will lead Israel to a stage of default on its debts.
As Israel announced a worsening budget deficit to reach 8.1% of GDP, due to increased government and military spending as its war on the Gaza Strip continues and enters its 11th month.
This is the 16th month that Israel’s fiscal deficit has risen, according to the Israeli economic newspaper Globes.
The deficit is expected to be no less than 7.8% by the end of the year, Fitch said, which is much higher than the government’s expectation of 6.6%.
What are the implications of a credit rating downgrade?
- A credit rating is an indicator of the risk of buying a country’s debt securities and the country’s ability to repay its debts. It is a degree given to a country based on its perceived ability to repay its debts.
- When the rating is downgraded, investors will demand a higher interest rate, which means that the Israeli government budget will incur additional costs on the interest it pays on its loans, which may lead to a decline in government investment operations, as it faces additional expenses to pay off debts and their interest instead of directing funds towards investment projects.
- Government investment is the main source of reviving the economy and restoring its strength. The current economic situation in Israel is the worst in decades, and it is expected that the coming period will be more difficult than what Israel faced after the October 1973 war, when it faced a war against both Egypt and Syria.
- The downgrade reflects concerns about financial and political stability, which could lead to a decline in the confidence of local and international investors. Investors may be reluctant to invest in a country facing increased risks, which could negatively affect the flow of foreign direct and indirect investment into the country.
- Impact on the currency: A downgrade usually puts pressure on the local currency, as investors may expect its value to decline as a result of economic pressures, which will lead to increased inflation and negatively affect citizens’ purchasing power.
Indeed, the shekel fell as much as 1.7% against the dollar on Monday, and stocks closed down about 1.5% in Tel Aviv.
Reactions to the rating downgrade
Some saw the downgrade of Israel’s credit rating as a natural consequence of its war on Gaza, the subsequent tensions in the region, attacks from Lebanon and threats from Iran, and drew criticism of the government’s handling of the war’s economic impact from others in politics and civil society. Here are some of the most prominent positions:
- “The downgrade in the credit rating due to the war, and the increased geopolitical risks it creates, is natural,” Israeli Finance Minister Bezalel Smotrich said. “We will win the war, the ministry will move the economy from war to a growth path, we will pass a responsible budget, and then the credit rating will quickly rise again,” he said.
- Prime Minister Benjamin Netanyahu’s office expressed this sentiment, saying the credit rating downgrade “is a result of Israel’s handling of a multi-front war it was forced to fight. The credit rating will rise again when we win, and we will win.”
For their part, the leaders of the Israeli opposition parties criticized the decline in the credit rating and considered it an indication of the government’s failure to manage the financial repercussions of the war.
- Opposition leader Yair Lapid said, “12 unnecessary ministries must be closed immediately, coalition funds must be canceled, growth engines must be strengthened instead of supporting those who do not work, and a balanced and responsible budget must be passed that meets the needs of the market and not political needs.”
- “When we told the prime minister and the finance minister that a major budget correction was needed, they were not even willing to close unnecessary government ministries and cut off coalition funds,” said National Unity leader Benny Gantz, adding that the low ratings were a result of prioritizing political interests over national interests.
- The civil society organization Movement for Quality Governance in Israel described the ratings drop as a “remarkable failure by the government to manage the economy,” and called for a 2025 budget and a long-term economic plan.
She added that there is a strong lack of confidence in the current government’s economic management regarding the war.
He added that it could still have an impact, explaining that some investors, such as some institutions or funds, do not invest in entities with ratings below a certain level.
