Moody’s lowers Israel’s credit rating for 2nd time this year, amid Hezbollah escalation
Agency says Israel has no ‘exit strategy’ from conflict, which would help calm investors, and ‘no longer expects a swift and strong economic recovery’
Sharon Wrobel is a tech reporter for The Times of Israel.
US rating agency Moody’s downgraded Israel’s credit rating for a second time this year on Friday, doing so this time by two notches, while citing the increased intensity of the fighting with Lebanon’s Hezbollah terror group and the lack of an Israeli “exit strategy.”
The prominent credit rating agency cut Israel’s score from A2 to Baa1, raising concerns that domestic political risks have increased alongside geopolitical ones “with material negative consequences for the country’s creditworthiness in both the near and longer term.”
A lower credit rating makes it more expensive for the Israeli government to raise debt at a time when it needs billions of shekels to fund the costs of the ongoing war and while investors see more risk to invest in the country.
Direct war costs have ballooned to more than NIS 250 billion ($67.6 billion) since the fighting erupted on October 7, after Hamas terrorists invaded Israeli southern communities, killing some 1,200 people, mostly civilians, and taking 251 as hostages into the Gaza Strip.
Since October 8, Hezbollah-led forces have attacked Israeli communities and military posts along the border on a near-daily basis, with the group saying it is doing so to support Palestinians in Gaza amid the war there.
“With heightened security risks, we no longer expect a swift and strong economic recovery as in previous conflicts,” Moody’s said. “In turn, a delayed and slower economic recovery in combination with a more prolonged and broader military campaign will more persistently impact public finances, further pushing out the prospect of a stabilization of the public debt ratio, compared to our earlier projections.”
Moody’s also maintained a negative outlook warning that Israel could be facing further downgrades, citing the risk of a severe escalation of the conflict with Hezbollah further weakening the country’s economic and fiscal strength.
Finance Minister Bezalel Smotrich on Saturday downplayed the impact of the downgrade and maintained that the action will be reversed once the conflict ends.
“Israel’s economy bears the burden of the longest and most expensive war in the country’s history,” said Smotrich. “The Israeli economy is a strong economy that even today attracts investments.”
“After we win the war even those who lowered our rating will return it to the real level of the Israeli economy,” he asserted.
The concern of potential escalation was registered even before Israel carried out a major strike in Beirut late Friday evening that targeted Hezbollah leader Hassan Nasrallah, with early indications suggesting that he did not survive. While the Moody’s announcement was published shortly, it is believed that the agency prepared it beforehand.
Earlier in the week, Israel carried out repeated strikes that devastated the Lebanese terror group’s senior command — this after two mass detonations of Hezbollah operatives’ communications devices, widely blamed on Israel, and which injured thousands.
“While both Israel and Hezbollah insist on not seeking an all-out war, Israel’s strategy of ‘targeted escalation’ in order to restore deterrence and get Hezbollah fighters to withdraw from the border area significantly increases the risk of a full-out war,” Moody’s said. “At the same time, prospects for a ceasefire in Gaza have receded.”
“There is no visibility on an exit strategy from the military conflict that would restore a level of certainty and security, on which the economy and business investment ultimately rely,” the rating agency cautioned.
Moody’s expects the Israeli economy to grow at a slow rate of 0.5% in 2024, and cut its growth outlook for next year to 1.5%, from 4% previously.
At the end of August, Moody’s already warned Israeli policymakers that an “all-out military conflict with Hezbollah or Iran could have significant credit consequences for Israeli debt issuers.” That’s after the rating agency in February, lowered Israel’s rating from A1 to A2, the first ever downgrade, and changed its outlook to negative, citing the impact of the ongoing Gaza war on the government’s debt burden.
Since the outbreak of war with Hamas on October 7, the other two major credit rating agencies – S&P and Fitch – joined Moody’s in cutting Israel’s sovereign rating with a negative outlook leaving the door open for further downgrades should the security situation escalate or the country’s fiscal position deteriorate.
In Friday’s assessment, Moody’s also scrutinized the government’s wartime conduct as being responsible for further straining the country’s public finances.
“In our view, the significant escalation in geopolitical risk also points to diminished quality of Israel’s institutions and governance which have not fully mitigated actions detrimental to the sovereign’s credit metrics,” the rating agency lamented. “With lower growth and higher defense needs for longer, the budget deficit will also be higher for longer than we assumed so far.”
In recent months, credit rating agencies, investors and even Bank of Israel governor Amir Yaron have been raising concern about the government’s willingness and ability to maintain fiscal responsibility and credibility by making appropriate spending adjustments to bring a widening budget deficit under control and lower debt.
Israel’s fiscal deficit in August grew to 8.3 percent of GDP, marking the fifth month that the deficit is above the annual government target of 6.6% of national output set for the end of 2024.
After weeks of delays, Smotrich this month presented an initial state budget framework for 2025 with a deficit target of 4% of GDP.
The government will need to offset increased military and civil costs of the war with tough spending cuts and introduce tax changes to increase state income and deal with a fiscal hole in 2025 of an estimated NIS 30 billion to NIS 40 billion.
“The budget preparation process has been delayed by around two months already and it remains to be seen whether all the proposed measures, among them a freeze on public-sector wages as well as on personal income tax thresholds and allowances, can be implemented as proposed,” Moody’s said.
In response, Smotrich said that the government will pass a “responsible budget [for 2025] with required restraint measures.”
“This is a war for our existence that we must continue until victory, to allow us to live many years in peace, security and economic growth,” Smotrich added.
Times of Israel staff contributed to this report.
