Moody’s Downgrade Reflects Rising Risks for Israel’s Economy During Ongoing War
By The Media Line Staff
Moody’s Investors Service has downgraded Israel’s credit rating for the second time this year, citing growing geopolitical risks and the prolonged conflict with Hezbollah in Lebanon. The agency lowered Israel’s rating from A2 to Baa1, a significant two-notch drop, and maintained a negative outlook. This downgrade raises concerns over Israel’s ability to manage its finances and maintain economic stability as the war with Hamas and Hezbollah drags on with no clear resolution in sight.
The conflict, which erupted on October 7 after Hamas launched a deadly attack on Israeli communities near Gaza, has since expanded to include Hezbollah. The Iranian-backed group has engaged in near-daily attacks on Israeli military positions and civilian areas along the northern border, further straining Israel’s defense resources. According to Moody’s, the lack of an “exit strategy” from the conflict and the possibility of further escalation with Hezbollah or even Iran present significant risks to Israel’s creditworthiness.
The agency also pointed to Israel’s ballooning war costs, which have exceeded NIS 250 billion ($67.6 billion) since the fighting began. With the Israeli government needing to borrow more to finance its war efforts, the downgrade will likely increase borrowing costs, making it more expensive for Israel to service its debt. Moody’s warned that the combination of slow economic recovery, higher military spending, and an extended conflict could push Israel’s debt ratio toward 70% of gross domestic product, up from the prewar forecast of 50%.
Moody’s also expressed doubts about Israel’s ability to return to economic growth as it had after previous conflicts. The agency now projects Israel’s economy will grow by just 0.5% in 2024, a sharp revision from the 4% growth forecast earlier. It cited weakened business confidence, disruptions to Israel’s vital high-tech sector, and a shrinking labor market due to the war. With many Palestinian workers unable to enter Israel and the government extending mandatory military service, labor shortages are expected to persist, particularly in sectors like construction.
In addition to the economic impact, Moody’s also highlighted concerns about the Israeli government’s governance and institutional strength. The agency noted that domestic political tensions, combined with the ongoing conflict, have further strained Israel’s capacity to implement effective policies to stabilize the economy.
In response to the downgrade, Israeli Finance Minister Bezalel Smotrich sought to reassure investors, stating that Israel’s economy remains strong despite the war. “After we win the war, even those who lowered our rating will return it to the real level of the Israeli economy,” Smotrich said. He also pledged to pass a “responsible budget” for 2025 to address the fiscal challenges.
Moody’s warned that Israel could face additional downgrades if the conflict with Hezbollah intensifies or if the Israeli government fails to regain control over its fiscal situation. The agency has also raised concerns about Israel’s long-term growth prospects, particularly in the high-tech sector, which has been a major driver of the country’s economy.
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