Credit rating agency Fitch lowered Israel's credit rating to "A" from "A+" on Monday citing worsening geopolitical risks and regional tensions amid the ongoing war in Gaza, which it says could last "well into 2025" and weigh on economic activity.
The agency kept the rating outlook negative, meaning a further downgrade is possible.
The ratings agency expects the Israeli government to permanently increase military spending by close to 1.5% of gross domestic product (GDP) versus pre-war levels, putting upward pressure on the country's budget deficit and debt levels.
Israel's monthslong war in Gaza has cost thousands of lives and unfolded into a humanitarian crisis and is in danger of expanding.
"In our view, the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts," the ratings agency said in a statement.
Prime Minister Benjamin Netanyahu said he expected the rating would be upgraded again once Israel wins the war.
"Israel's economy is strong and is functioning very well. The rating downgrade is a result of Israel dealing with a multi-front war forced upon it," Netanyahu said in a statement.
Earlier this year, Moody's and S&P Global also cut their credit rating for Israel, citing elevated geopolitical risks.
Fears that the conflict in Gaza could turn into a broader Middle East war have escalated after the killing of Hamas leader Ismail Haniyeh in Iran and top Hezbollah military commander Fuad Shukr in Beirut.
"The downgrade following the war and the geopolitical risks it creates is natural," Israeli Finance Minister Bezalel Smotrich said on X.
Israel's shekel fell as much as 1.7% against the dollar on Monday and stocks ended over 1% lower in Tel Aviv as investors fret over a possible attack on Israel. The shekel opened 0.3% higher on Tuesday while the stock market was closed for a Jewish fast day.
Heightened tensions between Israel and Iran and its allies could imply significant additional military spending, destruction of infrastructure and damage to economic activity and investment, Fitch said.
"Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above 70% of GDP in the medium term," Fitch said.
