The credit rating agency Moody’s announced on Tuesday that it is maintaining Israel’s current rating at Baa1, with a negative outlook. This decision comes despite the military campaign against Iran and the apparent improvement in Israel’s strategic position in the Middle East.
Justification of the decision
Moody’s justifies its position by citing Israel’s alleged fiscal weakness since October 7 amid geopolitical and security risks. The agency estimates that following the 12-day war with Iran, the debt-to-GDP ratio will peak at 75 percent, a figure slightly higher than the 70 percent projected by the Bank of Israel.
The agency nevertheless acknowledges the resilience of the Israeli economy despite security turmoil, and anticipates that the deficit will remain at a reasonable level. However, it highlights the very high security and geopolitical risks and the increase in defense spending.
Negative outlook maintained
The negative outlook leaves open the possibility of a future downgrade. Moody’s mentions the fragility of the ceasefire with Iran and the ongoing risks on other fronts. Even without further escalation, a state of frequent and significant attacks between Israel and Iran could increase Israel’s credit risks, the agency stated.
Lag with the markets
This decision contrasts with the sentiment of the financial markets, which in recent weeks have already factored in the end of the war and are anticipating an economic recovery. After the Iranian campaign, officials from the Israeli Treasury had estimated that Israel’s credit rating should improve soon, a hope that has now been dashed.
Reaction of the Israeli Treasury
The director of the Israeli State Comptroller’s Office, Yali Rothenberg, responded by emphasizing that “Moody’s rightly acknowledges the remarkable resilience of the Israeli economy in the face of prolonged confrontations, the country’s proven ability to raise capital under excellent conditions, and the continued growth and investment, even at the height of the conflict with Iran.”
He nevertheless criticizes the agency’s assessment: “We believe there is a gap between the agency’s evaluation and the full economic picture.” Rothenberg particularly disputes Moody’s assumptions of a high long-term deficit and real growth of only 2 percent in 2025, which he considers too pessimistic.
The official points out that Moody’s itself acknowledges the strong demand for government bonds, the stability of the exchange rate, and significant investments in high-tech, “characteristics of a resilient economy with significant drivers of growth.”