Fitch lowers Israel's rating, trade data points to expansion

ISRAEL - In Brief 14 Aug 2024 by Jonathan Katz

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Fitch lowered Israel’s sovereign rating from A+ negative outlook to A with a negative outlook. The main rationale is the elevated geopolitical risks including prolonged warfare into 2025 and possibly an escalation on other fronts. Fitch expects the fiscal deficit to reach 7.8% this year and 4.6% next, assuming fiscal adjustments, although it noted that so far, the government has yet to present a fiscal framework for 2025. The debt/GDP is expected to reach 70% this year and 72% next year, above most of the other countries rated A. Fitch notes that “Domestic politics remains fractious”. We note that the professional team at the MoF is working on a fiscal consolidation scheme of some 25bn ILS, but it is not clear whether this will receive the support of the government. Israel’s risk premium is already reflecting the elevated risks and actually reflects a lower rating than A. Therefore, we doubt markets will react to this piece of news, but instead will focus more on whether the risk of escalation remains high, and whether cease-fire negotiations progress or stall. Rapid growth in both exports and imports Foreign trade data for July indicate rapid growth in both industrial exports and imports of goods, a sign of expansion of economic activity. In July, exports increased by 6.7 percent compared with the second quarter, particularly pharmaceutical exports and metal products exports (possibly defense exports). Imports of consumer goods increased by 6.6 percent in May–July compared with the preceding three months (not annualized), indicating expansion in private consumption and supporting an increase in taxes in the budget as well. Imports of raw materials increased by 2.2 per...