Shekel falls as Fitch puts Israel on rating watch negative amid Gaza escalation risk

Ratings agency warns of increased risk of a large-scale military conflict if Hezbollah and Iran join the fighting, which could pull down Israel’s A+ credit rating

Sharon Wrobel is a tech reporter for The Times of Israel.

This photo shows signage for Fitch Ratings, in New York, October 9, 2011. (Henny Ray Abrams/AP)
This photo shows signage for Fitch Ratings, in New York, October 9, 2011. (Henny Ray Abrams/AP)

The shekel continued its weakening streak and Tel Aviv shares declined on Wednesday after Fitch put Israel’s A+ sovereign credit score on rating watch negative, citing heightened risk of a major escalation in the war with the Hamas terror group, which could result in a negative rating action.

“The risk that other actors hostile to Israel, such as Iran and Hezbollah, could join the conflict at scale has risen significantly, as indicated by regular fire exchanges on the Israel-Lebanon border and declarations from high-ranking officials in Iran and from Hezbollah,” Fitch cautioned in a report released late on Tuesday.

“Such large-scale escalation, in addition to human loss, could result in significant additional military spending, destruction of infrastructure, sustained change in consumer and investment sentiment and thus lead to a large deterioration of Israel’s credit metrics,” the ratings agency warned.

The shekel this week crossed the 4 per dollar threshold for the first time since 2015 as Israel declared war on Hamas after some 2,500 terrorists broke through the fortified Gaza border on October 7 and murdered some 1,400 people, most of them civilians, including babies, children and the elderly. Many were murdered in their homes and some 260 were massacred at an outdoor music festival.

The terrorists also kidnapped at least 199 people of all ages to the Strip and have since fired more than 5,000 rockets at Israeli cities.

Israel has responded with large-scale airstrikes on Hamas targets, and is readying for a ground operation in Gaza. Israel has said its forces also killed some 1,500 terrorists on Israeli territory.

In its report Fitch cautioned that a wider and longer war with multiple actors could lead to a “sustained fiscal drain, both from higher spending and lower tax collection, as well as loss of human and material capital and severe economic disruption.”

In the current situation of the conflict, assuming it is contained to Gaza, Israel’s economy is resilient to withstand the repercussions, according to Fitch.

“The combination of Israel’s dynamic, high-value added economy, the record of resilience to regional conflict, preparedness for military confrontations, solid fiscal and external metrics and cash buffers make it unlikely a relatively short conflict largely confined to Gaza will affect Israel’s rating,” Fitch said.

The A+ rating is not Fitch’s highest — the agency’s scale spans from AAA to D. An “A” rating denotes high credit quality with low risk of default, and a strong capacity for paying off financial commitments, but some vulnerability to adverse business or economic conditions.

Fitch, which is based in New York and London, is one of the three major credit rating agencies, along with Moody’s Investors Service and Standard & Poor’s.

Eight children were found dead in this house at Kibbutz Be’eri, killed by Hamas terrorists on October 7, 2023. (David Horovitz/Times of Israel)

In a report on Oct. 11, Moody’s warned that the Israeli economy, which it said has shown resilience to terrorist attacks and military operations in the past, is likely to be challenged in the coming weeks.

“A prolonged conflict that durably and significantly impairs economic activity and policymaking would test that resilience,” said Moody’s. “Therefore, how this conflict affects credit risk across the public, financial and corporate sectors will depend on its scale and duration, which is far from clear at this time.”

“The conflict could have global macroeconomic consequences as well,” the report noted.

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