Moody’s lowers Israel’s credit rating and declares negative outlook

U.S. rating agency Moody’s downgraded Israel’s credit rating Friday due to the impact of the ongoing war with Hamas in Gaza, lowering it by one level from A1 to A2.

In a statement, Moody’s said it did so after assessing that “the ongoing military conflict with Hamas, its aftermath, and broader consequences materially increase the political risk to Israel, as well as weaken its executive and legislative institutions and fiscal strength, for the foreseeable future.”

The rating agency also lowered the outlook for Israeli debt to “negative” because of the “risk of escalation” with the much more powerful Lebanese terrorist group Hezbollah, which operates along the northern border.

In a rare statement issued on Shabbat, Prime Minister Benjamin Netanyahu downplayed Moody’s decision.

“The Israeli economy is strong. The rating downgrade is not related to the economy but is entirely due to the fact that we are at war,” the premier said. “The rating will go back up the moment we win the war, and we will win the war.”

The war in Gaza was triggered after the devastating Hamas-led attack on Oct. 7, in which Palestinian terrorists killed about 1,200 people, mostly civilians, and took 253 hostages in the Gaza Strip. In response, Israel launched airstrikes and a ground offensive with the goal of toppling the Hamas government in Gaza and returning the hostages.

According to the Hamas-controlled Gaza Health Ministry, at least 27,947 people have died in the enclave, an unverified figure that does not distinguish between combatants and civilians and is believed to include Palestinians killed by errant rockets fired by terrorist groups in the Strip.

Following the attack, S&P Global Ratings lowered Israel’s credit outlook from stable to negative due to the risk that the conflict between Israel and Hamas will widen.

Fitch, the last of the big three U.S. rating agencies, placed Israel on negative watch for risks related to the conflict.

“The weakening security environment implies higher social risk and indicates weaker executive and legislative institutions than Moody’s previously assessed,” the rating agency said Friday in a statement explaining its decision. “At the same time, Israel’s public finances are deteriorating,, and the previously expected downward trend in the public debt ratio has reversed,” the agency continued.

“Moody’s forecasts that Israel’s debt burden will be materially higher than predicted before the conflict,” it added.

To pay for the increase in defense spending of about NIS 70 billion ($18.6 billion), the budget includes a 3 percent across-the-board cut to all ministries, with some exceptions. It also cuts about NIS 2.5 billion ($670 million) out of NIS 8 billion in coalition funds—discretionary funds earmarked for MK and ministerial projects—and contains a deficit target of 6.6 percent of GDP.

Notably, the current plan contains no provision for reducing the number of government departments, despite the Finance Ministry’s recommendation to close 10 superfluous ministries—including the Ministry of Settlements and National Missions, the Ministry of Jerusalem and Jewish Tradition, and the Ministry of Intelligence—to cover the war deficit.

In addition, the more tense international situation will certainly begin to take its toll on Israel’s economy, which has already been strained by the call-up of conscripts, people of working age who have had to suddenly leave their jobs, in a country with a population of less than 10 million.

So the war is taking a heavy toll on Israel’s economy as well, and it would obviously be appropriate to end the war as soon as possible. It seems, however, that this conflict will not end in the next few days