Israel's hopes of avoiding its first sovereign credit rating downgrade may be dashed.
On Tuesday, October 17th Eastern Time, international credit rating agency Fitch announced that it will include Israel's A+rated long-term domestic and foreign currency issuer default rating (IDR) in the negative rating watch (RWN) list.
Meanwhile, Fitch's F1+short-term domestic and foreign currency IDR ratings for Israel, as well as A+long-term foreign currency senior unsecured bond ratings, are also included in the RWN list.
Including RWN means that Fitch may downgrade Israel's rating in the future.
Fitch pointed out that the actions related to RWN reflect the increasing risk of the current escalation of the Israeli-Palestinian conflict, including the risk of large-scale military confrontation between Israel and multiple actors over a period of time, which may include confrontations with Hezbollah in Lebanon, armed groups in other regions, and Iran.
Fitch stated that the risk of escalating large-scale conflicts is not a fundamental assumption of Fitch, but this outcome could lead to significant additional military spending, infrastructure damage, and sustained changes in consumer and investor sentiment, leading to a significant deterioration of Israel's credit rating indicators.
Fitch believes that adverse risk factors for Israel, such as the potential large-scale involvement of Iran and Hezbollah in the conflict in Lebanon, have significantly increased. However, for Iran and Hezbollah, the cost of this risk escalation is high.
Fitch predicts that a significant escalation of the conflict may affect Israel's rating. This escalation may manifest as a broader and longer term conflict, leading to the continuous loss of fiscal revenue by the Israeli government due to increased spending and reduced taxation, as well as capital losses in human and material resources, and severe economic chaos.
A few days before the Fitch operation, an official from the Israeli Ministry of Finance revealed to the media his desire to avoid a downgrade at least for now. The official stated that due to its good financial situation, Israel should be able to avoid being downgraded for the first time, unless the war with Hamas continues for a long time.
The official believes that the downgrade of Israel's sovereign credit rating is an extreme situation, and it is expected that a more realistic possibility is that Israel will be placed under credit rating observation.