By Steven Scheer and Rodrigo Campos
JERUSALEM (Reuters) -The ceasefire agreement between Israel and Palestinian militant group Hamas in Gaza reduces the risks to Israel’s public finances and could improve its sovereign credit rating, the major credit rating agencies said on Tuesday.
The ceasefire, if adhered to, would increase the likelihood of Israel outperforming expectations for its 2025 fiscal and economic performance, Fitch said, adding that the credit risk could be lowered for the Middle East as a whole.
The agreement also reduces the risk that the conflict could escalate, drawing in Iran, with resulting spillover effects on energy prices and global supply chains due to shipping disruption in the Red Sea, according to Moody’s.
Israel’s rating had never been downgraded before last year, but the heavy cost of the last 15 months of fighting in both Gaza and Lebanon saw it cut multiple times by the major rating firms such as Moody’s, S&P Global and Fitch.
“For Israel, effective implementation of the ceasefire agreement and additional progress towards a durable de-escalation of hostilities in Gaza would reduce downside risks to the sovereign’s credit strength,” said Moody’s analyst Christian Fang.
S&P Global acknowledged implementation risks, underscored by a flare-up of violence in the West Bank, where Israeli security forces backed by helicopters raided the city of Jenin on Tuesday, killing at least eight Palestinians.
“In the coming weeks, we will assess whether the deal’s implementation can result in a sustainable ceasefire and reduce the risk of protracted or intensified military conflicts,” S&P analysts said on Tuesday.
Fitch and S&P said escalation risks were baked into their negative outlook on the sovereign rating, hinting at a possible change in the credit outlook if the ceasefire holds.
Fitch said a further reduction in the intensity of the conflict “would increase the likelihood of Israel’s fiscal and economic performance in 2025 being better than we had expected, though the influence on its credit profile would likely be modest”.
DOWNGRADES
Moody’s downgraded Israel’s credit rating two notches to “Baa1” from “A2” in September and maintained a negative outlook, citing escalation of the conflict in the region with Lebanese armed group Hezbollah. Israel forged a ceasefire deal with Hezbollah in November.
A ceasefire in Gaza would help sustain the ceasefire agreement with Hezbollah, Fang said.
“Israel’s military conflicts with Hamas and Hezbollah have exacted economic and fiscal costs,” he added.
The first phase of a ceasefire with Gaza took effect on Sunday, which led to the release of three of 33 hostages held by Hamas since its Oct. 7, 2023 attack on Israel. Some 94 hostages remain in Gaza. Israel also began releasing Palestinian prisoners as part of the deal.
Phase one will last for 42 days and negotiations are still needed for a permanent cessation of hostilities that would lower geopolitical tensions.
Israel recorded a budget deficit of 6.9% of gross domestic product in 2024 due to a spike in defence spending to fund the military conflicts.
The 2025 budget, which has yet to be approved, aims for a deficit of 4.4% of national output, although many economists see this as optimistic and a finance ministry official said last week it could reach 5%.
(Reporting by Steven Scheer in Jerusalem and Rodrigo Campos in New YorkEditing by Bernadette Baum, Christina Fincher and Gareth Jones)
Comments