Israel's Credit Rating Downgraded to 'Negative' by Moody's Due to War With Hamas

The present conflict in Gaza has prompted Moody’s to issue grim warning, as the credit rating agency expects Israel to increase its military expenditures, nearly doubling the amount spent in 2022 by the end of 2024. Moreover, there is a risk of the conflict escalating, with the possibility of Hezbollah's involvement.

A US rating agency, Moody's Investors Service, lowered Israel's credit rating from A1 to A2 owing to the blowback of the ongoing conflict with Hamas on its fiscal outlook on Friday, media reports said, citing Moody's.

“The ongoing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel, as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future,” the credit rating agency noted in a statement.

Although Israel's current rating is still regarded as investment grade, the review is expected to result in higher borrowing costs for the country. Moody's kept Israel's credit outlook negative, suggesting the potential for a future decline.

In mid-October 2023, shortly after Hamas attacked Israel on October 7, Moody's warned that Israel's creditworthiness was threatened with a potential downgrade.

The rating agency pointed out that Israel’s credit profile had shown resilience in past military conflicts, but “the severity of the current conflict raises the possibility of longer lasting and material credit impact.”

Prime Minister Benjamin Netanyahu offered an unusual statement seeking to downplay the importance of the Moody’s review.

“The Israeli economy is strong. The rating downgrade is not connected to the economy, it is entirely due to the fact that we are in a war...The rating will go back up the moment we win the war — and we will win the war,” he projected.

The conflict with Hamas erupted on October 7, 2023 following a surprise attack by the group, resulting in around 1,200 casualties, primarily civilians, and the abduction of around 240 individuals. Israel is reportedly incurring daily expenses of no less than one billion Israeli shekels ($269 million) due to the ongoing conflict.

The Moody's report surfaced while the Netanyahu-led government was putting forward its amended budget for the 2024 fiscal year. On Wednesday, the budget secured passage through the Knesset's first three phases of parliamentary debate.

For Israel to afford an increase in defense spending, it is cutting funding for all government ministries by three percent, except for a few cases. It is also trimming about 2.5 billion from eight billion Israeli shekels ($670 million) from a special fund for projects devoted to members of Knesset (MKs) and ministers. However, they aim for a 6.6 percent budget deficit of the country's total economic output.

“Some of the vulnerabilities will accompany us in the foreseeable future and burden the economy. This is a turning point in the Israeli economy that requires the mobilization of the government and all of us as a society,” Israeli Finance Minister Bezalel Smotrich said.

Meanwhile, S&P Global Ratings changed its outlook on Israel from stable to negative on October 24, 2023, citing a possible escalation of the Israel-Hamas conflict. Fitch flagged Israel for potential negative repercussions from the war on October 17.

“The weakened security environment implies higher social risk and indicates weaker executive and legislative institutions than Moody’s previously assessed...At the same time, Israel’s public finances are deteriorating, and the previously projected downward trend in the public debt ratio has now reversed,” Fitch stated.