Moody’s on Friday became the first major rating agency to downgrade Israel’s creditworthiness, citing the prolonged war with Hamas and the toll it is taking on the country’s finances.
Moody’s, one of three major rating agencies alongside S&P Global Ratings and Fitch, lowered Israel’s rating from A1 to A2. Credit ratings range from a low of D or C (for S&P and Moody’s scales) to AAA or Aaa for the most pristine borrowers. A rating of A2 is still a high rating, but Moody’s also noted that the outlook for the country was negative, dented by the social, political and economic risks arising from the conflict with Hamas.
The rating agency had put Israel on review after the Hamas-led Oct. 7 attacks, in which more than 1,200 people were killed, according to Israeli officials, and more than 250 taken hostage. Both S&P and Fitch also began to reassess Israel’s credit rating in November but have yet to take any action as a result.
In a statement announcing the decision, Moody’s said that it downgraded Israel because “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.”
Moody’s said it expected Israel’s military spending to double 2022’s outlay by the end of this year. That means more debt to fund the increase in spending.
It is typical for rating agencies to reassess a country’s creditworthiness after a major event that is likely to affect its ability to repay its lenders. Credit ratings are required by many investors who buy the debt of companies and countries as an indicator of the likelihood that they will get back the money they lent out.
S&P, which has also been re-evaluating Israel’s credit rating since October, has planned an update to the country’s credit rating for May 10. The rating agency noted in a report in November that Israel’s diversified economy and strong tech sector should give its finances ballast during the war, though it warned that a further escalation of the conflict to regions outside Gaza could strongly affect its decision-making.
“We could lower the ratings on Israel if the conflict widens materially, increasing the security and geopolitical risks that Israel faces,” S&P’s analysts noted. “We could also lower the ratings in the next 12-24 months if the impact of the conflict on Israel’s economic growth, fiscal position and balance of payments proves more significant than we currently project.”