Moody's Downgrades Israel's Credit Rating Amid Escalating Conflict
In a significant move, Moody's has downgraded Israel's credit rating by two notches, shifting it from A2 to Baa1. This marks the second downgrade for Israel this year, reflecting the growing economic strain caused by the ongoing war in Gaza and rising tensions with Hezbollah. The downgrade puts Israel just three steps away from non-investment grade status, raising alarms about its financial stability amidst escalating geopolitical risks.
Moody's assessment highlights that the negative outlook for Israel is a direct result of the intensified fighting with Hezbollah, particularly after Israel's recent military operations in Lebanon. The agency noted that geopolitical risks have escalated significantly, with potential long-term negative impacts on Israel's creditworthiness. The situation has grown more precarious, with fears that the conflict could extend to involve Iran and possibly the United States, leading to a wider regional conflict.
Economic Outlook Deteriorates as Costs Mount
The long-term economic outlook for Israel is increasingly bleak, with Moody's projecting a mere 0.5% growth for the current year and 1.5% for 2025. This is a stark decline from earlier estimates, reflecting the adverse effects of the ongoing military conflict. The Israeli government anticipates that the costs of the war could reach approximately $66 billion by the end of 2025, which would represent over 12% of the country's GDP.
Despite these grim forecasts, Israeli Finance Ministry officials have criticized Moody's decision as exaggerated and unjustified. Yali Rotenberg, the accountant general, emphasized the need for urgent action to pass the 2025 state budget, aiming to address the rising budget deficit, which is expected to hit 7.5% of GDP this year, and a debt-to-GDP ratio projected to rise to 70%.
As Israeli bonds face mounting pressure, with yields on 10-year government bonds rising significantly, the financial landscape appears increasingly unstable. Moody's has indicated that without a clear exit strategy from the ongoing military conflict, Israel's economic stability and ability to attract investment will remain in jeopardy. The challenge lies in balancing military actions with the urgent need for economic recovery, as failure to do so could lead to a prolonged period of economic decline.
