Moody’s Investors Service has downgraded Israel’s credit rating for the second time this year, citing increased geopolitical risks and the protracted conflict with Hezbollah in Lebanon. The agency significantly downgraded Israel’s rating by two notches, from “A2” to “Baa1,” and maintained a negative outlook. The downgrade raises concerns about Israel’s fiscal management and ability to maintain economic stability as its war with Hamas and Hezbollah drags on with no clear resolution in sight.
The conflict erupted on October 7 after Hamas launched deadly attacks on Israeli communities near Gaza, and has since expanded to include Hezbollah. The Iranian-backed group carries out near-daily attacks against Israeli military positions and civilian areas along the northern border, further straining Israel’s defense resources. According to Moody’s, the lack of an “exit strategy” from the conflict and the possibility of further escalation with Hezbollah and even Iran pose significant risks to Israel’s creditworthiness.
The agency also noted that Israel’s war costs have ballooned to more than NIS 250 billion ($67.6 billion) since the start of hostilities. Since the Israeli government will need to borrow more to finance the war, a downgrade will likely increase borrowing costs and make Israel’s debt service costs even higher. Moody’s estimates that Israel’s debt ratio as a percentage of gross domestic product (GDP) could rise from pre-war estimates of 50% to 70% due to slow economic recovery, increased military spending, and prolonged conflict. he warned.
Moody’s also expressed doubts about Israel’s ability to return to economic growth like it did after past conflicts. The agency now predicts that Israel’s economy will grow by just 0.5% in 2024, a significant revision from its previous forecast of 4% growth. The report cited declining business confidence, disruption to Israel’s vital high-tech sector, and a shrinking labor market due to the war. Labor shortages are expected to continue, especially in sectors such as construction, as many Palestinian workers are unable to enter Israel and the government extends mandatory military service.
In addition to the economic impact, Moody’s also highlighted concerns about the governance and organizational strength of the Israeli government. The agency noted that domestic political tensions and the ongoing conflict have combined to place further strain on Israel’s ability to implement effective policies aimed at stabilizing its economy.
Following the downgrade, Israel’s Finance Minister Bezalel Smotrich sought to reassure investors, saying the Israeli economy remained strong despite the war. “If we win the war, the countries that we downgraded will also restore their ratings to the real level of the Israeli economy,” Smotrich said. He also promised to pass a “responsible budget” in 2025 to address fiscal challenges.
Moody’s warned that Israel could face further downgrades if the conflict with Hezbollah escalates or if the Israeli government fails to regain control of its fiscal situation. The agency also expressed concern about Israel’s long-term growth prospects, particularly in the high-tech sector, which is a major driver of the country’s economy.
