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A ceasefire between Israel and Hezbollah could limit financial risks for the country, Fitch Ratings has said. However, experts note that the situation remains tense, and the prospect of a lasting ceasefire in Gaza remains elusive.
According to Fitch, the conflict with Hezbollah, which has escalated since August 2024, has led to an increase in the cost of mobilising reservists, military supplies, compensation for victims and a slowdown in economic activity. If the ceasefire in Lebanon can be maintained, this may reduce the financial burden, but events in Gaza and Iran’s actions will continue to determine Israel’s economic trajectory.
Budget deficit: rising risks
Fitch forecasts that Israel’s budget deficit in 2024 will be 7.8% of GDP, similar to its August forecast. In 2025, the deficit could rise to 5.2% of GDP, exceeding the previous estimate of 4.6%. Increased defence spending, in particular due to the conflict with Hezbollah, is playing a key role in this growth.
The agency also forecasts an increase in the public debt-to-GDP ratio to 72% in 2025, up from 60.5% in 2022. This ratio will remain above the average level for countries with a similar credit rating in the ‘A’ category.
Geopolitical and political challenges
Fitch also noted that the ceasefire could reduce the risk of escalation between Israel and Iran, a Hezbollah ally. However, the threat of a large-scale regional conflict remains high. The policy of the administration of the newly elected US President Donald Trump towards Iran will have an additional impact, which could change the regional dynamics.
In addition, Moody’s, which downgraded Israel’s credit rating to Baa1 in September, maintains a negative outlook, noting that internal political risks are also key. According to the agency, judicial reform and controversial initiatives to exempt ultra-Orthodox Jews from military service are only exacerbating social tensions.
Financial markets react to the ceasefire
Following the announcement of a ceasefire between Israel and Hezbollah, Israeli bonds, which were under pressure during the war, began to recover their positions. At the same time, there has been a slight improvement in the performance of Lebanese bonds, which are in crisis.
Despite the encouraging signals, Fitch and Moody’s emphasise that the future stability of Israel’s financial position depends on the duration of the ceasefire, regional dynamics and domestic political stability. Risks remain high, which could affect both the country’s economic recovery and its long-term prospects.
