(Bloomberg) -- Fitch Ratings affirmed Israel’s long-term sovereign debt rating at A+ while downgrading the country’s outlook to negative, taking a cautious approach to assessing the impact of the ongoing war in Gaza. 

The rating company’s Tuesday decision is the second to be published since the start of Israel’s campaign against Hamas almost six months ago, and contrasts with Moody’s decision in February to downgrade Israel’s rating for the first time due to economic uncertainties triggered by the conflict. 

Read More: Israel Hit With First Downgrade Ever as Moody’s Cites War Impact

“Geopolitical risks associated with the war in Gaza remain elevated and escalation risks remain present, but Fitch believes the risks to the credit profile have broadened and their impact may take longer to assess,” wrote a team of analysts led by Cedric Berry. 

The negative outlook, said Fitch, reflects uncertainties around Israel’s fiscal policies and the war’s duration and intensity, including the risk of regional escalation. 

Israeli Finance Minister Bezalel Smotrich responded that Israel’s economy is strong and will continue to be so. “War creates many challenges for the economy and we will continue to act in the set of steps required to hedge and minimize the risks and return to a rapid growth path,” he said in a statement.

Israel’s shekel was down 0.5%, in line with losses in emerging-market currencies, and traded at the lowest level since January. The country’s dollar bonds fell, with the January 2050 note slipping 1.3 cent to 65.99 cents on the dollar.

The war is stretching Israel’s public finances, with its cost estimated by the central bank at 255 billion shekels ($69 billion) over 2023-2025. The government’s revised budget for 2024 included spending cuts and new taxes, though a deficit at 6.6% of gross domestic product was still the widest for Israel this century outside the Covid-19 pandemic. 

Israel has relied far more on debt to fund its needs since the start of the war, selling 61 billion shekels ($16.5 billion) of bonds by the end of February followed by another $8 billion public issuance last month.

Fitch forecasts a slightly higher budget deficit of 6.8%. It projects debt-to-GDP to rise to 65.7% in 2024 and 67% in 2025, but says “the combination of higher permanent military spending and uncertain macroeconomic trends could mean that debt will remain on an upward trend beyond 2025.” 

 

--With assistance from Srinivasan Sivabalan.

(Updates with further economic data starting in seventh paragraph.)

©2024 Bloomberg L.P.