Israel’s sovereign debt was cut by one notch by Fitch Ratings, which kept a negative outlook on the credit as continued military conflict weighs on the country’s public finances.

The ratings firm lowered the country’s score to A from A+, citing “continued war” and geopolitical risk as drivers, according to a statement Monday.

The action “reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks and military operations on multiple fronts,” analysts including Cedric Julien Berry and Jose Mantero wrote. “In our view, the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts.”

Human losses, significant additional military spending, destruction of infrastructure and sustained damage to economic activity and investment could all lead to a deterioration in credit metrics, Fitch said. It also added tensions in the region “remain high.”

Fitch projects the nation’s budget deficit could reach 7.8% of gross domestic product this year from 4.1% in 2023, and expects debt to remain above to 70% of GDP in the medium term. The median for A rating peers is 55% for 2025, Fitch said.

Moody’s Ratings gave Israel it’s first-ever sovereign downgrade in February, cutting its credit rating by one notch to A2 with a negative outlook.

“The downgrade following the war and the geopolitical risks it creates is natural,” Finance Minister Bezalel Smotrich said in a statement following the decision. “We will pass a responsible (2025) budget that will continue to support all the needs of the war, while maintaining fiscal frameworks and promoting growth engines.”

Israel reported last week its 12-month trailing deficit widened to 8.1% of GDP in July, from 7.7% at the end of the previous month.

“It is necessary to act as soon as possible to formulate a responsible state budget for 2025 based on a process of rebuilding the fiscal reserves through a gradual decrease in the ratio of debt to GDP,” Yali Rothenberg, General Accountant at Israel’s Finance Ministry, said in response to the downgrade.

  - Bloomberg