The ceasefire agreement between Israel and Hamas could reduce risks to the economy and public finances if it is adhered to and more progress is made, Big Three credit rating agencies Moody’s and Fitch said Tuesday.
Both agencies cautioned that the ceasefire faces risks and may not prove durable. The terms of the ceasefire are currently “limited in scope and duration” and the ceasefire will also likely face difficulties similar to those the November ceasefire saw, Moody's highlighted.
“Domestic political challenges and security concerns are some hurdles for Israel that may impede further progress,” Moody's said, and Fitch also highlighted implementation risks "particularly revolving around whether Hamas and the Israeli authorities are seen to be upholding their commitments under the deal."
Fitch also anticipated that "Israel’s fiscal position [will] 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," adding that military spending will remain high.
Moody’s highlighted that this ceasefire, if sustained, could strengthen the ceasefire with Hezbollah.
Looking at the region more broadly, while the ceasefire could reduce risk, “regional geopolitical tensions will remain heightened in the absence of a durable ceasefire and de-escalation of tensions,” Moody's warned, adding that the risk of escalation could quickly be reignited by renewed hostilities between Israel and Iran-backed groups or the Islamic Republic itself.
Strengthening ceasefires
Fitch hedged that there are "material risks that may impede the realization of potential improvements in regional security," highlighting the ceasefire with Hezbollah and the change of government in Syria.
The danger of an escalation in regional violence involving Iran remains significant, Fitch added.
A sustained ceasefire could also reduce tail risks from escalations resulting in a full-scale conflict with Iran, Moody's said.
These risks include heightened security concerns, energy and supply chain disruptions, and weaker macro-financial conditions, which could negatively affect sectors like tourism, real estate, and investment, as well as Israel’s ability to raise funds abroad through debt markets.
“Israel’s military conflicts with Hamas and Hezbollah have exacted economic and fiscal costs,” Moody's explained, saying the conflicts have also raised the country’s susceptibility to geopolitical risks and weakened institutions and governance.
“While GDP growth likely remained positive in 2024, real GDP contracted by an average of 2.4% year on year from fourth-quarter 2023 to the third quarter of 2024, compared to an average quarterly year-on-year growth of 4.7% from second-quarter 2022 to the third quarter of 2023.”
Moody's also commented on the country’s fiscal deficit, saying it widened by around 5-6 percentage points of GDP since the start of the conflict, in spite of government efforts to mitigate “a deterioration of the fiscal balance.”
“A durable and material de-escalation of tensions would reduce the risk of further weakening of fiscal and economic metrics, although a reversal of the deterioration seen so far is unlikely in the near future.”
“Effective implementation of the ceasefire agreement and additional progress towards a durable de-escalation of hostilities in Gaza would reduce downside risks to the sovereign’s credit strength,” Moody's also said.
A sustained ceasefire with Gaza and further "reduction in the intensity of the conflict" could increase Israel's fiscal and economic performance in 2025, though " the influence on its credit profile would likely be modest," Fitch said.
Fitch also said last week that a ceasefire could be positive for Israel’s rating with the company, which currently has a negative outlook.
Moody’s downgraded Israel’s sovereign credit rating from A2 to Baa1 in September – its second downgrade since the outbreak of the Israel-Hamas War and a fall of two notches for Israel’s rating. Fitch dropped Israel's rating from A+ to A with a negative outlook in August.