On Friday, September 27, Moody’s downgraded Israel’s credit rating for the second time this year, expressing concerns about the ongoing military escalation with Hezbollah and the absence of a clear “exit strategy” for the conflict. The rating agency lowered Israel’s score by two notches, from A2 to Baa1, signaling a significant increase in the perceived risks to the country’s financial stability. This downgrade reflects both the growing domestic political instability and the escalating geopolitical tensions in the region.
The downgrade comes amidst intensified Israeli airstrikes targeting Hezbollah positions in Lebanon, including reports of a major attack aimed at Hezbollah leader Hassan Nasrallah late Friday. While Israel has claimed that Nasrallah did not survive the strike, this declaration has further inflamed tensions in an already volatile situation.
Moody’s emphasized that the prolonged conflict, coupled with rising domestic political instability, poses “material negative consequences” for Israel’s creditworthiness. The agency highlighted the pressure the war is placing on public finances, adding to the financial burden of the ongoing conflict.
“With heightened security risks, we no longer expect a swift and strong economic recovery as in previous conflicts,” Moody’s stated. The agency expressed concerns that a protracted military campaign could delay any economic rebound, potentially pushing out earlier projections for stabilizing Israel’s public debt ratio.
As a result, Moody’s revised its economic growth forecast for Israel to just 0.5 per cent in 2024, significantly lower than the previous 4 per cent projection. For 2025, it predicts growth of 1.5 per cent, indicating a slower-than-expected economic recovery. The agency also issued a negative outlook, warning that further downgrades could follow if the conflict escalates, particularly with Hezbollah.
As Israel continues its military operations, the risks of further economic strain and weakened fiscal strength remain significant. The latest downgrade underscores the financial challenges Israel faces while fighting on multiple fronts, spending billions of shekels on its war effort, while investors grow increasingly cautious about the country’s long-term economic prospects.
