Moody’s downgraded Israel’s credit rating for the second time this year, as the economic costs of the ongoing war in Gaza rise and tensions with Hezbollah rise.
Bloomberg said that the rating had been lowered by two levels from “A2” to “Baa1”, which makes Israel only 3 steps away from non-investment grade. According to Moody’s, the negative outlook for Israel was maintained, which reflects growing concern about its ability to maintain its economic stability in light of the escalating security crises.
Increasing geopolitical risks
Moody’s indicated in its unscheduled announcement that “geopolitical risks have escalated significantly, which has led to tangible negative impacts on Israel’s credit capacity in the short and long term,” and this comes in light of the escalation of fighting with Hezbollah in Lebanon, where Israel launched attacks on its headquarters. The party in the southern suburb of Beirut in one of the largest military operations against Lebanon in nearly two decades, which led to the killing of the party’s Secretary General, Hassan Nasrallah, and the leaders of the first ranks.
This escalation raised fears of the possibility of the crisis slipping and the war spreading to include Iran, which is the main supporter of Hezbollah, which increases the possibility of the outbreak of a broader regional conflict that also includes the United States, as described by Bloomberg.
The Israeli newspaper Calcalist said that Moody’s economic forecasts for Israel in the long term have become darker, noting that the Israeli economy “will be permanently weaker as a result of the current military conflict, compared to previous expectations.” In its new assessment, Moody’s expected the economy to grow by only 0.5% this year and 1.5% in 2025, which is a significant decline compared to previous estimates, and this reflects the negative impact of the increasing conflict on the economy, according to Calcalist.
The Israeli government estimates that the cost of the ongoing war could reach about $66 billion by the end of 2025, which represents more than 12% of GDP, according to Bloomberg. According to government estimates, these numbers are based on the assumption that the conflict with Hezbollah will not escalate into a comprehensive confrontation.
Israeli reactions
The Accountant General of the Israeli Ministry of Finance, Yali Rotenberg, considered Moody’s decision “exaggerated and unjustified.” “The severity of this measure is disproportionate to Israel’s financial and economic data,” he told Bloomberg. He pointed out that it is clear that the war on the various fronts imposes a price on the Israeli economy, but this does not justify the rating agency’s decision.
Calcalist says that although the government strongly opposes this reduction, the financial reality appears worrying, as the budget deficit this year is expected to reach 7.5% of GDP, while the debt-to-GDP ratio is expected to rise to 70%. This far exceeds previous Finance Ministry estimates.
In light of these financial challenges, Rotenberg stressed the need to take “decisive and rapid steps” to approve the state budget for 2025. The Ministry of Finance and the Central Bank stressed that the process of approving the budget was delayed, and that there was an urgent need to make cuts in some areas to confront the increase in defense spending, according to Quoted by Calcalist.
Rotenberg pointed out that “the budget must encourage growth engines, invest in infrastructure, take into account social needs, and meet Israeli security requirements.”
Increasing pressures
The numbers indicate that Israeli bonds are under severe pressure, as yields on 10-year government bonds rose by about 100 basis points this year, while the differences between them and US bonds reached their highest level in 11 years.
Israeli dollar-denominated bonds are currently among the worst performers in the world compared to other government bonds, according to Bloomberg indexes.
Uncertain future outlook
Moody’s notes that Israel needs a clear exit strategy from the military conflict if it wants to restore economic stability and attract investments. However, the agency notes that the Israeli government has not yet developed a clear strategy, and this raises concerns about its ability to deal with financial and geopolitical challenges, Calcalist said.
For its part, Calcalist confirmed that Israel faces a major dilemma between continuing the military escalation with Hezbollah or trying to achieve economic recovery. The agency concluded that Israel needs to achieve a balance between restoring economic stability and dealing with security threats. Without this balance, it may face a path of continued economic decline.
Moody’s explains that the ongoing conflict will lead to “a significant increase in Israel’s political risks, weaken its executive and legislative institutions, and undermine its financial strength.” If this situation continues, the Israeli economy may find itself in a state of continued weakness, unless the government takes serious and practical measures to deal with the current challenges.
