Big three ratings agency Moody's ratings downgraded Israel's credit rating, dropping the country two notches – from A2 to Baa1.While it cited intensified geopolitical risk as the key driver in this ratings decision, the agency painted a complex and bleak picture of Israel’s economic and political future.Here are 10 things you should know about the agency’s ratings update:
1. Following the numerous drops in Israel’s credit rating over the months of the Israel-Hamas War, Finance Minister Bezalel Smotrich has been insistent that Israel’s rating will bounce back after the war is won.Moody’s explicitly stated in Friday’s ratings explanation that the agency “no longer expect[s] a swift and strong economic recovery as in previous conflicts.”
“We consider that Israel’s economy will be more durably weakened by the military conflict than expected earlier,” Moody’s explained.This slower economic recovery, combined with a more extensive military campaign, will have a more significant impact on public spending and push back further “the prospect of a stabilization of the public debt ratio,” the company said.2. Moody’s made specific reference to the Haredi draft in its ratings rationale, saying that “the bill to include ultra-orthodox men into military service is being delayed by the government, even though it would lessen the burden on those already serving.”The company cited this as evidence of the higher domestic risk in Israel.3. Continuing in this vein, Moody’s pointed to Justice Minister Yariv Levin’s conduct as another source of domestic risk.The agency said, “The justice minister has been delaying important judicial appointments, including to the position of president of the Supreme Court, despite a recent Supreme Court ruling requiring him to convene the relevant judicial appointments committee.”4. The agency highlighted the Israeli government’s failure to lay out an exit strategy from the military conflict.Such a strategy would “help to restore a level of certainty and security, on which the economy and business investment ultimately rely,” it explained.5. The agency no longer expects the military confrontation to end in the “foreseeable future” and has updated its baseline scenario accordingly.“The conflict and absence of a clear route to its resolution contribute to high social tensions and rising risks to Israel’s trade,” said the agency.6. The agency praised Israel’s civil society and judiciary but said their ability to provide strong checks and balances has been weaker than expected.“While civil society and the judiciary have proven to be relative strengths in Israel’s institutional structure, we now consider their ability to provide strong checks and balances to be somewhat weaker than expected so far.”7. The agency touched on the impact of Israel’s need for reservists, saying that constraints on the labor market are expected to remain “stronger than expected for longer” as the government extends reserve duty.It also touched on the impact of Palestinian workers being unable to work in Israel. “This is particularly relevant in the construction sector; before the war, Palestinian workers (including from Gaza) accounted for around 30% of those employed in the sector, which accounts for over 5% of GDP,” explained the agency.8. The agency predicted that Israel’s growth will remain weak for the remainder of 2024 and 2025, citing low growth in Q2 and adding that growth has been almost exclusively driven by government spending.The agency significantly reduced its expectation for growth next year from 4% to 1.5%.The agency also forecasted a higher deficit for 2025 of around 6% of GDP. Moody’s added that it expects “this year’s deficit to be wider than the government target of 6.6% of GDP at around 7.5% of GDP, given lower GDP growth and additional spending on reservists and evacuees from the North.”“We expect the government debt ratio to stabilize later and at a higher level than assumed previously. We now forecast the debt ratio to rise towards close to 70% of GDP, compared to our forecast of a decline towards 50% before October 7.”9. The agency commented on Israel’s work on the 2025 budget, highlighting that its preparation has been delayed and casting doubt on whether it will include the necessary measures to contend with the economic impacts of the war.“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.”10. The ratings agency left Israel’s outlook at negative, meaning there could be further ratings drops in the future, emphasizing that severe escalation would be “consistent with a markedly lower rating.”“Uncertainty over Israel’s security and longer-term growth prospects are much higher than is typical at the Baa rating level, with longer-term risks to the highly mobile hi-tech sector particularly relevant,” the agency added.“The ratings would likely be downgraded further, potentially by multiple notches, if the current heightened tensions with Hezbollah turned into a full-scale conflict.”