Moody’s rating agency downgraded Israel’s credit rating by two notches on Friday, stating that “geopolitical risk has intensified significantly” and citing the government’s long-shelved judicial reform push.
The downgrade, which followed an escalation in hostilities between Israel and Hezbollah in Lebanon, took Israel’s rating at Moody’s from the A2 level enjoyed by Poland, Lithuania and Slovakia to the “Baa1” level shared by Spain and Bulgaria.
Israeli officials and others downplayed the move or criticized it as excessive; it may mean fewer investments in Israel and a higher interest on the national debt. Others pointed to it as fresh evidence of government failures on internal political issues.
The report on the downgrade cites as its immediate reason the military conflicts that began on Oct. 7, after Hamas terrorists invaded Israel and massacred 1,200 people.
The report, which contains a negative projection for Israel, says that “With heightened security risks (a social consideration), we no longer expect a swift and strong economic recovery as in previous conflicts.”
Israeli Finance Minister Bezalel Smotrich attributed the downgrade to the cost of the ongoing conflict. “Israel’s economy is bearing the cost of the longest and costliest war in the country’s history,” Smotrich wrote in a statement Friday. He added that Israel must “press on to victory” and that the market still draws investors during wartime.
“We will pass, with God’s help, a responsible budget with the necessary restraint and, after victory is achieved, also those who lowered the rating will return it to [reflect] the true level of the Israeli market,” he wrote.
Israel currently has a different rating at each of the three major credit rating agencies. At Fitch, Israel’s rating (A) is one notch higher than at Moody’s, alongside Japan and Slovenia. S&P also rates Israel at A, alongside Spain, Saudi Arabia and Iceland.
Moody’s, which has faced allegations of political bias also over its 2016 warning that a Trump presidency would “significantly” hurt the U.S. economy, lowered Israel’s outlook in 2023 before the outbreak of war for domestic political reasons.
In April 2023, Moody’s changed Israel’s rating outlook from “positive” to “stable” due to the judicial reform effort led by Israeli Prime Minister Benjamin Netanyahu.
Smotrich last year dismissed the 2023 downgrade as a “pessimistic and unfounded political manifesto.”
The report announcing Friday’s downgrade also contains references to the internal struggle over the judiciary’s power, and a mention of the controversial exemption of Haredi men from military service, which is a major rallying issue on the Israeli left.
“The justice minister has been delaying important judicial appointments including to the position of the President of the Supreme Court, despite a recent Supreme Court ruling requiring him to convene the relevant judicial appointments committee,” Friday’s report says.
Itai Ater, an economist and founder of the left-leaning Israeli Economists’ Forum for Democracy, wrote on X that the downgrade “reflects the grim condition of the Israeli economy and the rapid decline since January 2023,” when Netanyahu’s government assumed power.
“The report uses moderate language but the message is unequivocal: The Israeli government is crushing its democratic institutions and dragging us decades back in time,” Ater added.
Economist Amatzia Samkai said that the downgrade was excessive, biased and outdated. “I would understand a Moody’s downgrade by one notch two weeks ago. A two-notch downgrade now is excessive and implies a built-in bias (not new),” Samkai wrote.
“Israel’s military achievements suggest an improvement in the geopolitical arena. The prospect of a regional war is irrelevant because in such a case, also economically, it would be a problem for multiple countries and not only Israel. Certainly now Israel’s rating should be increased, though I have no such expectations from Moody’s,” added Samkai.
