Moody's Lowers Israel's Credit Rating from A2 to BAA1 - Lowest rating it has ever received

In a significant move, the international credit rating agency Moody's announced this evening that it has downgraded the credit rating of the Israeli government from A2 to BAA1. This two-level drop reflects growing concerns over geopolitical risks, marking the lowest rating Israel has ever received. The downgrade aligns Israel's rating with Kazakhstan, Peru, Andorra, Thailand, Bulgaria, Uruguay, and Spain.

Alongside with the downgrade, Moody's issued a negative outlook, indicating that further reductions could occur within the next 12 to 18 months.

Negative Outlook for Future Ratings

This marks the second downgrade of Israel’s rating by Moody’s this year, following a previous reduction in February. Competing agencies, Fitch and S&P, have also revised Israel's ratings downward.

Moody's cited the significant increase in geopolitical risks as the primary factor behind the downgrade. The agency expressed concern over the intensifying conflict between Israel and Hezbollah, particularly in light of Israel's plans to resettle evacuated residents in northern areas. The current situation has diminished the likelihood of a ceasefire in Gaza and has heightened internal political risks.

The report predicts a longer-term weakening of Israel's economy due to ongoing military conflicts. Moody’s states that societal expectations of a rapid economic recovery—similar to those seen after previous conflicts—have shifted. As a result, the agency forecasts a slower recovery and a further delay in stabilizing the debt-to-GDP ratio.

Implications for Growth and Investment

Moody's anticipates that Israel's economic growth will remain weak, lowering its growth forecast for 2023 to just 0.5%, and 2024 from 4% to 1.5%. The agency warns that ongoing security uncertainties may hinder business investments and increase the risks associated with trade.

Labor market constraints are expected to persist, particularly in sectors like construction that have relied on Palestinian workers. The government's plans to extend military service could also exacerbate existing labor shortages.

Erosion of Trust in Institutions

The report highlights a worrying trend regarding the perceived quality of Israel's institutions, noting a downgrade in Israel's governance score from G1 to G2. Moody's emphasizes the government's failure to articulate a clear exit strategy from the military conflict, which is vital for restoring investor confidence.

In response, Yehli Rotenberg, the Accountant General at the Ministry of Finance, criticized Moody's decision as excessive and unjustified, calling for a reevaluation of the agency's assessment of the Israeli economy.

The downgrade by Moody's underscores a pivotal moment for Israel's economy, raising concerns over the long-term impacts of ongoing geopolitical tensions and the capacity of the government to manage economic stability. The implications for investment and growth in the coming years remain uncertain.