Moody’s keeps Israel outlook negative, citing defense costs, fragile Iran ceasefire

Moody’s has decided to maintain a negative outlook on Israel’s country rating, leaving the door open for further rating cuts, and warning about “higher defense spending and weaker economic growth” amid a “fragile” ceasefire with Iran.

The global credit rating agency emphasized that the negative outlook reflected “downside risks…driven by very high geopolitical and security risks.” A lower rating raises credit costs for government, businesses, and households.

“The implications of these risks for Israel’s fiscal and economic outlook could be more severe than we currently assess,” Moody’s said. “The recent opening of a direct military conflict with Iran will weigh further on Israel’s public finances.”

Moody’s cautious report, released late on Monday, comes after a ceasefire took hold on June 24, ending a 12-day campaign against Iran. Meanwhile, Israel’s discussions of a potential ceasefire and hostage release agreement with a weakened Hamas terror group have been underway.

“The ceasefire between Israel and Iran remains fragile,” Moody’s said. “Direct conflict with Iran, if prolonged, would exacerbate Israel’s fiscal challenges through materially higher government spending and weaker revenue generation, resulting in larger annual fiscal deficits and higher debt levels than we currently project.”

“Renewed conflict would also threaten Israel’s economic strength through potential material damage to infrastructure and the weakening of security conditions that could weigh on investment and overall economic activity,” the rating agency added.

Moody’s kept Israel’s Baa1 credit rating in place, citing the country’s “significantly weakened fiscal position as a result of the escalation in geopolitical risk,” since the outbreak of war with the Hamas terror group in Gaza on October 7, 2023.

“Despite ceasefires in place with Iran and Hezbollah in the north and a moderation of risks from the military conflict in Gaza, geopolitical and security risks remain significant and a source of downside credit risks for Israel,” Moody’s cautioned. “Over the past 18 months, the significant escalation in geopolitical risk has materialized in weaker prospects for Israel’s government finances, which we have reflected in prior rating actions.”

“At the same time, given Israel’s very strong market access, we expect debt to remain relatively affordable and for the government to have no problems meeting its funding needs,” the rating agency said.

On a positive note, Moody’s remarked that the “rating factors in demonstrated economic resilience to the shock of a prolonged military conflict on multiple fronts, which we expect to continue.”

Moody’s projected that Israel’s economy will grow by two percent in 2025, and by 4.5% in 2026. The forecast is lower than Monday’s revised forecast by the Bank of Israel for GDP growth of 3.3% in 2025 and 4.6% in 2026.

“Moody’s rightly takes notice of the impressive resilience of the Israeli economy despite a prolonged conflict, the country’s proven ability to raise capital on very favorable terms, and continued growth and investment – ​​even at the height of direct conflict with Iran,” said Finance Ministry Accountant General Yali Rothenberg. “However, given the strategic achievements, exceptional international support, and relative fiscal strength – we believe that there is a gap between Moody’s assessment and the full economic picture.”

“I am confident that the rating agencies, including Moody’s, will continue to closely monitor developments and, accordingly, will know how to update their positions so that they reflect in a more balanced manner the strengths of the Israeli economy,” Rothenberg said.

In September, Moody’s cut Israel’s credit score by two levels from A2 to Baa1, citing the “diminished quality of Israel’s institutions and governance” in their ability to manage state finances, and increased spending needs during the war period.