Moody’s Downgrades Israel’s Credit Rating to A2

By Aryeh Stern

In an unprecedented move, Israel’s credit rating has been downgraded to A2 by international credit rating agency Moody’s on Friday. The downgrade, the first in the state’s history since its inclusion in rankings in 1995, reflects a negative outlook, suggesting the possibility of further decline. Moody’s cited substantial and enduring geopolitical risks, particularly security concerns, as key factors contributing to the downgrade.

The agency expressed concerns over heightened security risks being linked to increased socioeconomic challenges in Israel. It anticipates potential strains on the country’s institutions, especially the executive and legislative branches, as they focus on restoring security. Moody’s highlighted the risk of an escalation in the war, particularly involving Hezbollah in northern Israel. The downgrade is seen to significantly amplify Israel’s geopolitical risks during and after the current conflict with Hamas, weakening legislative and executive branches and affecting the state’s fiscal resilience.

Moody’s also noted that the ongoing war against the Hamas, while potentially de-escalating, lacks a definitive agreement or a long-term plan for Israel’s security rehabilitation. The agency highlighted the deterioration in the state’s fiscal situation, reversing the downward trend in the debt-to-GDP ratio. Projections indicate a substantial increase in defense spending, nearly doubling by the end of 2024 compared to 2022. Despite the government’s efforts to offset impacts with measures like a VAT increase, Moody’s predicts a rise in the debt-to-GDP ratio to 67% by 2025, up from an initial forecast of around 55%.

The negative outlook is driven by the potential risk of escalating conflict, especially involving Hezbollah in northern Israel. Moody’s emphasized the significant economic impact such escalation could have, with potential contractions in real GDP and damage to infrastructure.