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Fitch Keeps Israel’s “A” Credit Rating Unchanged but Flags Negative Outlook
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Core Event: Rating Review Highlights Political and Fiscal Risks
Fitch Ratings left Israel’s sovereign credit rating at “A” but placed a negative outlook on the rating. The agency’s latest review warns that a tightly contested Knesset election and a fragmented parliamentary landscape could keep the country in a caretaker-government mode for months, raising the risk of a future downgrade. The outlook reflects concerns about rising public debt, high defense spending, and the difficulty of reducing the fiscal deficit under prolonged political uncertainty.
Background & Context: Election Uncertainty and Government Instability
Israel’s national election is scheduled for October 27. Polls do not show either of the two main blocs able to secure the 61 seats needed for a stable coalition. Fitch notes that Israel has a history of short-lived governments that struggled to enact fiscal reforms, and it cautions that the current administration may remain in a transitional role until a coalition forms or additional elections are called.
Data & Statistics: Deficit, Debt, and Growth Outlook
| Indicator (forecast) | Fitch’s projection | Source |
|---|---|---|
| Government deficit (% of GDP) – 2026 | 7.5% | Fitch |
| Government deficit – 2027 | 6.6% | Fitch |
| Government deficit – 2028 | 5.1% | Fitch |
| Finance Ministry deficit (12 months to Sep) | 3.2% of GDP | Finance Ministry |
| Public debt (% of GDP) – 2025 | 68.5% | Fitch |
| Public debt – 2026 | 70.3% | Fitch |
| Public debt – 2027 | 71.7% | Fitch |
| Public debt – 2028 | 72.1% | Fitch |
| Real GDP growth – 2025 | 3.5% | Fitch |
| Real GDP growth – 2026 | 3.2% | Fitch |
| Real GDP growth – 2028 | 3.0% | Fitch |
| Current-account surplus (% of GDP) – 2026 | 2.1% | Fitch |
| Current-account surplus – 2027 | 2.3% | Fitch |
| Current-account surplus – 2028 | 2.5% | Fitch |
Fitch attributes the high deficit primarily to defense expenditures, while noting that strong revenue collection early in the year could temper the 7.5% forecast.
Official Statements & Responses
Fitch emphasizes that Israel’s “A” rating remains supported by a diversified, high-value-added economy and robust external finances, despite elevated debt levels and a record of unstable governments. The agency warns that any escalation in regional tensions or further debt growth could trigger a downgrade.
Why It Matters: Potential Impact of a Downgrade
A downgrade from “A” would increase borrowing costs for the Israeli government, businesses, and households, tightening fiscal space at a time when deficit reduction is already challenged by defense spending and political deadlock.
Conflicting Reports & Gaps
Fitch’s projected deficit of 7.5% of GDP for 2026 differs markedly from the Finance Ministry’s reported 3.2% deficit for the 12-month period ending in September. Fitch calculates the deficit for the full fiscal year and includes accrued but unpaid revenues and expenses, whereas the Finance Ministry reports cash-flow-based figures. The methodological gap prevents a direct comparison of the two numbers.
What’s Next: Election and Government Formation
With the October 27 election looming, Fitch expects the incumbent administration to continue as a caretaker government for “a few months” while coalition talks proceed or further elections are scheduled. The agency’s negative outlook remains contingent on how quickly a stable government can be formed and whether defense spending and debt growth stay within projected bounds.