Moody’s downgrades Israel’s ratings to Baa1, maintains negative outlook
Moody’s Ratings downgraded on Saturday Israel’s long-term local and foreign-currency issuer ratings to Baa1 from A2, impacting the local-currency and foreign-currency senior unsecured ratings. The foreign-currency senior unsecured shelf rating and Medium-Term Note (MTN) rating were adjusted to (P)Baa1 from (P)A2, accompanied by a negative outlook.
The latest downgrade reflects heightened geopolitical risks adversely affecting Israel’s creditworthiness. Recent escalations between Israel and Hezbollah coincide with efforts to repatriate approximately 60,000 evacuees to the North, potentially increasing military engagement. Additionally, prospects for a ceasefire in Gaza appear bleak, further exacerbating political and geopolitical risks. While the risk of broader conflict with Iran remains low, uncertainty around Israel’s security and long-term growth prospects is heightened, particularly for the critical high-tech sector.
GDP Growth
The ratings agency expects Israel’s economic growth “to remain weak in the remainder of this year and in 2025.”
Moody’s now forecasts real GDP growth slowing to 0.5 per cent in 2024 and 1.5 per cent in 2025, down from earlier expectations of 4 per cent. In the second quarter of 2024, real GDP growth was just 0.2 per cent compared to the previous quarter and 1.5 per cent lower than a year ago, driven primarily by government consumption, while investment and exports contracted.
The budget deficit is projected to widen to approximately 7.5 per cent of GDP in 2024, exceeding the government’s target of 6.6 per cent, with an estimated deficit of around 6 per cent of GDP for 2025. Consequently, the government debt ratio is expected to rise towards 70 per cent of GDP, in contrast to previous estimates predicting a decline to 50 per cent.
Other Downgraded Ratings
Moreover, Moody’s has lowered Israel’s local-currency and foreign-currency country ceilings to Aa3 from Aaa, reflecting elevated geopolitical risks. The Environmental, Social, and Governance (ESG) Credit Impact Score has been revised to CIS-5 from CIS-4 due to increased social risks tied to the ongoing conflict. The governance score was adjusted to G-2 from G-1, highlighting deteriorating institutional strength.
Factors leading to an upgrade appear unlikely under the negative outlook; however, stabilisation could occur if a durable cooling of military conflicts enables policies that foster economic recovery and restore security.
“…. there is no visibility on an exit strategy from the military conflict that would restore a level of certainty and security, on which the economy and business investment ultimately rely.” Moody’s noted.
“In addition, the conflict and absence of a clear route to its resolution contribute to high social tensions and rising risks to Israel’s trade given transport and shipping restrictions, concerns around Israeli suppliers being able to meet schedules, risks of formal or informal trade restrictions and, more generally, rising risks of undermining Israel’s relations with key allies.”
Attribution: Moody’s
Subediting: Y.Yasser
