Moody’s lowers Israel’s credit rating again, says economic recovery from war will be slow and delayed

For the second time this year, U.S. ratings agency Moody’s lowered Israel’s credit rating on Friday, this time by two notches from A2 to Baa1.

The downgrade is bad news for Israel, as a lower credit rating makes it more expensive for Israel to raise debt. At this point, Israel needs to raise billions of shekels to fund the war against Iran and its proxies, especially as many investors have shied away from the Jewish state since the onset of the multi-front war.

Since the Oct. 7 invasion and terror attack in southern Israel by the Hamas terrorist organization, the cost of fighting on several fronts has increased exponentially to more than NIS 250 billion ($67.6 billion).

Moody’s also said it doesn't expect Israel to bounce back from its economic troubles anytime soon.

“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.”

In addition, Moody’s warned that Israel risks further downgrades due to the ongoing conflict in the north with Hezbollah.

“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 stated. “At the same time, prospects for a ceasefire in Gaza have receded.”

Moody’s downgraded Israel’s credit rating for the first time in February, from A1 to A2.

Moody’s noted it had not been able to identify an exit strategy for the IDF that would restore the kind of certainty necessary for potential investments.

“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.

Furthermore, Moody’s predicted that the Israeli economy will only grow at a slow rate of 0.5% in 2024, cutting its growth outlook for next year to 1.5% from 4% previously.

The Israeli government’s handling of the war is partially responsible for Israel’s financial situation, according to Moody's.

“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 noted. “With lower growth and higher defense needs for longer, the budget deficit will also be higher for longer than we assumed so far.”

Israel’s fiscal deficit has continued to rise, reaching 8.3% of GDP in August. This marks the fifth consecutive month that the deficit exceeds the government’s annual target of 6.6% of national output set for the end of 2024.

After two months of delays, in September, Finance Minister Bezalel Smotrich presented an initial state budget framework for 2025 with a deficit target of 4% of GDP.

“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.