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ֳ Wire

Lasting Gaza Ceasefire Would Ease Credit Risks in Israel and Wider Region

Tue 21 Jan, 2025 - 7:30 AM ET

ֳ-Hong Kong/London-21 January 2025: A durable cessation of the war in Gaza would reduce risks captured by the Negative Outlook on Israel’s ‘A’ sovereign rating, ֳ says, and add to the potential for a broader easing of security risks in the Middle East following recent developments in Lebanon and Syria. Nonetheless, there is still a high degree of uncertainty over how sustainable any reduction in violence will be, and political risks in Israel could pose challenges to fiscal consolidation.

ֳ assigned the Negative Outlook when it downgraded Israel’s rating from ‘A+’ in August 2024. While the conflict did broaden substantially after the downgrade, it did not result in significant additional Israeli military spending, or destruction of infrastructure and more sustained damage to economic activity and investment within Israel, though the human costs remained high. A more stable regional environment, supported by a sustained ceasefire would significantly reduce the risk of such outcomes, which had already been eased by Israel’s ceasefire with Hezbollah in Lebanon.

A sustained Gaza ceasefire with a further reduction in the intensity of the conflict could also lead to lower Israeli military spending and less disruption to production in the border areas, and to tourism and construction. This 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.

Nonetheless, we believe the ceasefire agreement will face significant implementation risks, particularly revolving around whether Hamas and the Israeli authorities are seen to be upholding their commitments under the deal. There are also material risks that may impede the realisation of potential improvements in regional security stemming from the Israel-Hezbollah ceasefire and the change of government in Syria. Meanwhile, the danger of an escalation in regional violence that involves Iran remains significant and the new Trump administration’s policy towards the region could affect Israel and its regional approach.

ֳ expects Israel’s fiscal position to remain weaker than it was prior to the war in Gaza, even assuming some upside to near-term budget performance if the latest ceasefire holds and accounting for consolidation measures included in the draft budget. We believe the government will permanently increase military spending by close to 1.5% of GDP a year from pre-conflict levels. Israel is likely to maintain a stronger presence along its borders than in the past, and plans to widen the mandatory draft and to increase domestic military production will also add to spending.

Israel’s medium-term fiscal prospects are still subject to a high degree of uncertainty, reflecting risks around military spending plans, coalition priorities and the shape of Israel’s economic recovery.

Sustained regional security improvements would reduce geopolitical risks for other regional sovereigns, including Jordan (BB-/Stable) and Egypt (B/Stable). They could reduce risks to external finances if they lead to higher regional tourism exports, for example. Nonetheless, we believe the direct impact on these sovereigns’ ratings should be small in the near term, as conflicts in Gaza, Lebanon and Syria were not previously key rating drivers. We expect Houthi forces in Yemen to remain a significant security threat, which will weigh on Egypt’s foreign-exchange earnings from traffic through the Suez Canal, although the group’s announcement in the wake of the Gaza ceasefire that they will limit their attacks on international shipping to Israeli-owned and -flagged vessels signals that this threat could ease in 2025.

Contacts:

Cedric Berry
Director, Sovereign Ratings
+852 2263 9950

ֳ (Hong Kong) Limited
19/F Man Yee Building
68 Des Voeux Road Central
Hong Kong

Paul Gamble
Senior Director, Sovereigns
+44 20 3530 1623


Duncan Innes-Ker
Senior Director, Risk
Credit Commentary & Research (Including ֳ Wire)
+852 2263 9993








Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com

The above article originally appeared as a post on the ֳ Wire credit market commentary page. The original article can be accessed at . All opinions expressed are those of ֳ.


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