Moody’s lowers Israeli credit rating, downgrades outlook from ‘stable’ to ‘negative’
Ratings agency warns ‘public finances are deteriorating,’ predicts ‘materially higher’ debt burden amid war in Gaza; says lowered outlook due to ‘risk of escalation’ with Hezbollah
The US ratings agency Moody’s downgraded Israel’s credit rating Friday due to the impact of its ongoing war with Hamas in Gaza, lowering it by one notch from A1 to A2.
In a statement, Moody’s said it had done so after assessing that “the ongoing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel, as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future.”
The ratings agency also lowered its outlook for Israel’s debt to “negative” due to “the risk of an escalation” with the far more powerful Lebanese terror group Hezbollah that operates along its northern border.
In a rare statement issued over Shabbat, Prime Minister Benjamin Netanyahu played down the Moody’s decision.
“The Israeli economy is strong. The rating downgrade is not connected to the economy, it is entirely due to the fact that we are in a war,” the premier said.
“The rating will go back up the moment we win the war — and we will win the war,” he predicted.
The war in Gaza was sparked after the devastating Hamas-led onslaught on October 7, in which Palestinian terrorists killed some 1,200 people, mostly civilians, and took 253 as hostages into the Gaza Strip. In response, Israel launched airstrikes and a ground offensive aimed at toppling the Gaza-ruling Hamas and returning the hostages.
According to the Hamas-controlled health ministry in Gaza, at least 27,947 people in the enclave have died, an unverified figure that does not differentiate between combatants and civilians and is believed to include Palestinians killed as a consequence of errant missiles fired by terror groups in the Strip.
Following the attack, S&P Global Ratings lowered Israel’s credit outlook from stable to negative on risks that the Israel-Hamas conflict could broaden.
Fitch — which is the last of the big three US ratings agencies — placed Israel on negative watch over risks from the conflict on October 17.
“The weakened security environment implies higher social risk and indicates weaker executive and legislative institutions than Moody’s previously assessed,” the ratings agency said Friday in the statement explaining its decision.
“At the same time, Israel’s public finances are deteriorating and the previously projected downward trend in the public debt ratio has now reversed,” it continued.
“Moody’s expects that Israel’s debt burden will be materially higher than projected before the conflict,” it added.
The Moody’s announcement came as the coalition is advancing an amended 2024 wartime budget, which on Wednesday cleared the first of three Knesset plenum readings in must pass to become law.
To pay for the defense spending increase of around NIS 70 billion ($18.6 billion), the budget includes an across-the-board cut of 3 percent from all government ministries with some exceptions. It also slashes around NIS 2.5 billion ($670 million) out of NIS 8 billion in coalition funds — discretionary funds earmarked for pet projects of MKs and ministers, and contains a deficit target of 6.6% of GDP.
Notably, the current plan does not contain any provisions for reducing the number of government departments, despite the Finance Ministry’s recommendation that 10 superfluous ministries — including the Settlements and National Missions Ministry, the Jerusalem and Jewish Tradition Ministry, and the Intelligence Ministry — be closed to cover the wartime shortfall.
Before Wednesday’s vote, Finance Minister Bezalel Smotrich touted the budget as a responsible spending package that will provide the necessary resources for Israel to achieve victory against Hamas while noting that the expenses incurred during the war will not disappear with the end of hostilities.
“Some of the vulnerabilities will accompany us in the foreseeable future and burden the economy. This is a turning point in the Israeli economy that requires the mobilization of the government and all of us as a society,” he said.
The war with Hamas — which began on October 7 when the terror group led a surprise cross-border onslaught, killing some 1,200 people, the large majority of them civilians, and taking some 240 people hostage — is reportedly costing Israel at least NIS 1 billion ($269 million) a day.
