Fitch warns of political deadlock's impact on Israel's credit rating

Fitch Ratings has issued a warning regarding Israel's political landscape, indicating that the current deadlock may result in prolonged uncertainty and a potential downgrade of the country's credit rating. With the Likud Party holding approximately 27 seats and Prime Minister Benjamin Netanyahu's coalition falling short of the 61-seat majority needed to govern, the situation remains precarious.

The agency noted that if Netanyahu fails to form a government within the initial 28-day mandate, the task may be handed to Gadi Eisenkot, who leads a bloc with 48 seats. If neither can secure a majority, the Knesset could face dissolution, leading to elections within 90 days. Fitch analysts predict that elections may occur as early as April, particularly if the Knesset fails to approve the state budget by March 31.

The absence of a stable coalition raises concerns about economic stability, as the lack of an approved budget could result in significant spending restrictions. Under a continuation budget, the government would be limited to spending one-twelfth of the previous year's budget monthly, which could lead to fiscal tightening. Fitch emphasized that while this may temporarily reduce the fiscal deficit, it does not reflect sound fiscal policy but rather the consequences of political paralysis. The agency anticipates that Israel's debt-to-GDP ratio will continue to rise, contributing to its negative credit outlook.