Moody’s recently downgraded Israel’s debt, citing ongoing war conditions and warning of a significantly larger anticipated budget deficit in the coming years. The country’s rating was lowered from A1 to A2, with an adverse outlook. If Israel faces an attack from Hezbollah in the North, it could face further downgrades.
The main driver for Moody’s assessment is that the ongoing conflict with Hamas, its aftermath, and wider consequences will “materially raise political risk for Israel, as well as weaken its executive and legislative institutions and its fiscal strength for the foreseeable future.” Even if an agreement were formed, its durability would remain “highly uncertain.” And if there is a conflict resolution, Israel could face a period of “elevated domestic political upheaval and renewed polarization when the war cabinet dissolves.”
Moody’s pointed out that Israel’s public finances are deteriorating amid the war. “Over the coming years, Israel’s budget deficit will be significantly larger than expected before the conflict.” The positive outlook is unlikely in the near future, and a full-scale conflict with Hezbollah in the North would likely further lower the rating.
While the conflict is expected to affect Israel’s public finances negatively, businesses have expressed confidence that the economy will emerge strong. Organizations such as Intel, led by finance Minister Betzalel Smotrich, have made significant investments in Israel during the present crisis, helping to foster confidence in the state of Israel and its economy. Israel’s tech sector remains strong, making up 18 percent of the country’s GDP, roughly 50 percent of its exports, and contributing significantly to taxes. Government initiatives to support startups and tech incubators demonstrate a commitment to investing in growth.