In its latest report, international credit rating agency Moody’s has decided to maintain Israel’s credit rating at A2 with a negative outlook, citing concerns over the country’s fiscal data and security situation. This decision comes after Moody’s downgraded Israel’s rating from A1 to A2 in February, and is based on the agency’s assessment of the country’s economic and geopolitical risks.

According to Moody’s, the probability of another downgrade is low, but the risk of escalation to a full conflict with Iran or its proxies, such as Hezbollah, remains a significant concern. The agency notes that while the risk of escalation is still relatively low, it could have a significant impact on Israel’s credit profile.

The ongoing conflict is expected to have a negative impact on Israel’s fiscal data, with the budget deficit and government debt expected to increase significantly compared to previous forecasts. Moody’s estimates that this year’s deficit will reach 7.8%, almost one percent higher than its previous estimate. The agency notes that additional expenses, such as housing solutions for evacuees in the north of the country, will also contribute to the increase in expenses and the expansion of the deficit.

Israel’s Finance Minister Bezalel Smotrich (Flash 90)

While the economic cost of the war may continue in the long term, Moody’s notes that the recovery of the Israeli high-tech sector in the first quarter of 2024 is a positive sign. The agency reports that investments in the sector reached $1.74 billion, similar to the first quarter of 2023, and that there are no indications of a decrease in foreign investor interest or in the number of exits.

Israel’s credit rating is currently one notch below that of S&P, which lowered Israel’s rating from AA- to A+ with a negative outlook three weeks ago. Fitch, another rating agency, has maintained Israel’s rating at A+ with a negative outlook.

The Israeli Ministry of Finance has reported a budget deficit of 7% at the end of April, higher than the target for the entire year 2024. The ministry attributes the high figure to a technical reason – a delay in some tax payments due to the Passover holiday. However, expenses have jumped by nearly 36% compared to the first four months of 2023, with defense expenses accounting for about two-thirds of the increase.

The Bank of Israel estimates that the total cost of the war will reach NIS 255 billion during 2023-2025. To address the expenses of the war, the government has established a series of budgetary adjustments, including an increase in VAT to 18% next year, which is expected to generate annual revenues of 0.35% of GDP. However, the budget hole is larger than initially thought, and the deficit may reach 7% in 2025 if no further reduction measures are taken.

Main article photo: Signage is seen outside the Moody’s Corporation headquarters in Manhattan, New York, US.
(photo credit: Reuters/Andrew Kelly)