Israel’s ceasefire in Lebanon could help limit strains on Israel’s credit profile, Big Three rating agency Fitch Ratings said on Thursday.
While the company said it expects that “the ceasefire is likely to be fragile, and prospects for an imminent ceasefire in Gaza remain poor,” it said that a durable de-escalation, potentially resulting from the ceasefire, could “limit pressure on Israel’s public finance metrics.”
Escalation with Hezbollah since August has put “pressure on Israel’s fiscal metrics through the cost of reservists mobilized on the northern border, use of military supplies, compensation payments for affected residents, and lower economic activity.”
Fitch forecasts Israel's budget deficit rising in 2025
If the ceasefire is sustained, it will reduce fiscal risks, but “developments in Gaza and with Iran will still play an important role in determining Israel’s fiscal and economic trajectory,” Fitch said.
“The ceasefire, if sustained, will remove a key potential driver for increased conflict between Israel and Iran, a close ally of Hezbollah. However, the risk of a major escalation in regional violence that involves Iran remains significant,” the company said.
“The attitude of the new Trump administration towards Iran is likely to have an impact on Israel and its regional policy.”
Fitch predicted Thursday that Israel’s budget deficit will stand at around 7.8% of gross domestic product in 2024, the same as its prediction in its August review.
The agency’s prediction for the 2025 deficit, however, was 5.2% of GDP, up from the agency’s August prediction of 4.6%.
“The escalation of conflict with Hezbollah did not form part of our baseline assumptions in August, but the associated costs have been partly offset by robust revenue performance in 2024,” the agency explained.
Fitch’s assumption is that there will be more military spending than the Israeli government’s 2025 budget bill allows for.
“Debt/GDP will rise close to 72% in 2025 from a recent low of 60.5% in 2022,” the company forecasted. “This would be above the median for sovereigns in the ‘A’ category, of 58%,” it said, highlighting that they expect Israel’s debt-to-GDP ratio to remain higher than other countries with the same rating.
The agency pointed to the government’s priorities as one of the factors that will impact the budget deficit – possibly keeping this above a “debt-stabilizing level in 2026 and beyond.”
The deficit will depend on coalition priorities, as well as military spending levels and the “shape of Israel’s economic recovery.”
It is too early to say whether Israel’s ceasefire deal with Hezbollah in Lebanon has “significantly and sustainably” reduced the risk that led Moody’s to downgrade the country’s sovereign credit rating, the agency said on Thursday.
“It is too early to say whether these risks will be significantly and sustainably reduced,” Moody’s said.
The agency downgraded Israel’s credit rating to Baa1, from A2, in September.
Earlier on Thursday, Fitch said the ceasefire deal could limit strains on Israel’s credit profile.
Israel’s bonds, which have been under pressure during the war, gained after the ceasefire deal took effect on Wednesday, while Lebanon’s deeply distressed bonds also got a boost.
Moody’s maintained a negative outlook on Israel’s rating after its September downgrade, which came amid the escalation of the conflict in the region. They warned that more downgrades were possible because of the uncertainties over the country’s security and longer-term economic growth prospects.
On Thursday, it also said that while geopolitical risks “appear to have partially diminished,” domestic political risks remained.
“In our view, the Israeli government is pursuing policies that add to already high social tensions in the country,” Moody’s said, citing disputed judicial reforms and attempts to permanently exempt the ultra-orthodox from military service.