More Ratings Cuts Anticipated After Moody’s Downgrades Israel Two Notches, Reports Reuters

By Steven Scheer

JERUSALEM – Analysts suggest that Moody’s recent two-notch downgrade of Israel’s credit rating may not be the final assessment as ongoing conflicts escalate state spending and raise concerns about the economy’s recovery speed.

Moody’s unexpected decision on Friday to reduce Israel’s credit rating from "A2" to "Baa1" has drawn criticism from government officials but highlights the uncertainty surrounding Israel’s economic outlook amid the ongoing conflicts. According to the agency, further downgrades could follow, particularly if the situation with Hezbollah escalates into full-scale warfare.

Bank Hapoalim economist Victor Bahar pointed out that a Baa1 rating typically describes countries that are less wealthy and developed than Israel. This latest downgrade places Israel’s rating three notches within the investment grade category, down from six earlier this year.

Yair Avidan, a former Israeli banking regulator, acknowledged the challenges ahead to maintain the current rating. The war against Hamas in Gaza has incurred an estimated cost of 250 billion shekels ($67 billion), and Israel is also dealing with rocket attacks from Hezbollah in Lebanon.

Moody’s has expressed skepticism regarding a rapid economic recovery, attributing this to the prolonged nature of the conflict and the lack of a clear resolution. Karnit Flug, a former central bank chief now at the Israel Democracy Institute, noted that the downgrade signals increasing risks to the economy.

Israeli leaders, including Finance Minister Bezalel Smotrich, argue that Moody’s decision, which follows similar cuts from other rating agencies, underestimates the resilience of Israel’s economy. Fitch anticipates a long-term increase in defense spending, while S&P Global has raised concerns about rising geopolitical risks and a growing budget deficit.

Yali Rothenberg, the Israeli Accountant General, acknowledged that multi-front wars would impose economic costs but criticized the justification for the downgrade. Economic growth has taken a hit, slowing to an annualized rate of 0.7% in the second quarter, marking a per capita contraction of 0.9% due to population growth.

An analysis by the Aharon Institute for Economic Policy predicts that a full-scale war with Hezbollah could result in a 3.1% economic contraction this year and a budget deficit reaching 9.2% of GDP.

As defense expenditures rise and Prime Minister Benjamin Netanyahu’s coalition demands retention of favored spending programs, Moody’s has scrutinized the government’s fiscal policies. The proposed budget aims for a deficit of 4% of GDP and includes 35 billion shekels in spending cuts.

A senior government official expressed that Moody’s should have waited for the approval of the budget, which is already two months behind schedule due to coalition disputes. Flug commented that the agency’s stance indicates a lack of confidence in the government’s fiscal management.

Despite the concerns, many in Israel’s business sector believe that the economy’s inherent strengths, particularly its vibrant high-tech industry, outweigh the doubts regarding future government spending. Yossi Abu, CEO of NewMed Energy, criticized Moody’s decision as a major error that fails to recognize Israel’s resilience and spirit.

The Bank of Israel continues to advocate for spending cuts and tax increases to address a deficit projected by the government at 6.6% of GDP for 2024 but currently standing at 8.3%. Moody’s forecasts a 7.5% deficit for the current year.