March 27 (Reuters) - Global ratings agency Fitch on Friday reaffirmed Israel's "A" credit rating, saying recent military operations will likely sharply reduce Iran's threat to the country.
However, it kept a negative outlook, warning that rising public debt and prolonged military activity could derail growth and efforts to reduce the fiscal deficit.
U.S.–Israeli strikes on Iran have added to concerns over Israel's deficit, coming shortly after the country reached a ceasefire agreement with Gaza - a development
that had prompted S&P and Moody's to upgrade their outlooks on Israel to stable.
"The wars since October 2023 are likely to have a prolonged impact on Israel's potential growth, which is also hampered by long-standing structural challenges," Fitch said, adding that the impact of oil price shocks on Israel's inflation is limited.
'FRACTIOUS' POLITICS THREATENS FISCAL REFORM
Fitch said Israel's "fractious domestic politics" could hinder fiscal consolidation, noting a record of unstable governments that rarely serve full terms.
It also expects military spending to stay high in 2026, well above pre-war levels, as Israel's involvement in Lebanon deepens and operations continue.
The increased expenditure will widen the central government's cash budget deficit this year, Fitch said, before narrowing in 2027 as military spending declines.
It said the outlook could be revised to stable if debt stabilises over the medium term through fiscal consolidation or de-escalation of conflicts, while any escalation that materially harms the economy or public finances could trigger a downgrade.
(Reporting by Raechel Thankam Job and Yamini Kalia in Bengaluru. Editing by Anil D'Silva and Mark Potter)
