Moody’s: Political risks weigh on Israel’s rating

International rating agency Moody’s has skipped its semi-annual rating announcement for Israel, and has instead issued a review of the prospects for Israel’s sovereign rating.

During the Swords of Iron war, Moody’s has cut Israel’s rating sharply, to Baa1 with a negative outlook. This is two notches below the rating Israel receives from rival agencies S&P and Fitch. The latter, incidentally, is due to publish a rating announcement for Israel within the next few weeks.

In the current review, Moody’s sets out the opposing components of Israel’s rating. “Israel’s sovereign credit profile reflects very high political risks that have weakened economic and fiscal strength. Institutions remain strong overall, but have weakened in recent years. The credit profile remains supported by high wealth levels, a solid external position and the government’s continued strong market access,” the agency’s analysts write.

In Moody’s method, Israel’s credit profile is determined by four factors. For economic strength, it receives a high a1 rating, but this is undermined by lower ratings for the other three factors: institutions and governance strength (a3); fiscal strength (baa2); and susceptibility to event risk (caa).

Moody’s raises its growth forecast for Israel’s GDP in 2025 from 1.5% to 3.8%, thus coming into line with the majority of forecasts, which are around 4%.

On the shaky security situation, the review states, “While Israel had agreed to temporary ceasefires with both, we consider these agreements to be fragile with significant risk of renewed escalation, until sustainable long-term peace agreements are agreed to and implemented. In March 2025, renewed military conflict in Gaza underscored this risk,” although it adds, “The risk of a broader regional escalation involving Iran remains, although the probability is low.”

On the positive side, Moody’s mentions three main factors in Israel’s economic strength: resilience to shocks; the net international creditor position with a deep investor base and strong US support; and high wealth levels “which provide some shock absorption capacity.”

On the negative side, the review highlights “very high exposure to geopolitical risks”; a “polarized political system, which weighs on governance and policy effectiveness”; and “low labor-market participation of religious minorities, resulting in high income inequality and elevated social tensions.”

Moody’s comments at some length on the growing internal tensions in Israel. “Implementation of a contentious bill to include ultra-orthodox men into military service continues to be delayed by the Israeli government, reflecting political and social divisions within the country. As a result, tensions between the government and judiciary have materially increased,” it notes.

Despite its negative rating outlook, Moody’s lists several positive aspects of Israel’s economy. “Following three consecutive year-on-year quarterly contractions in 2024, the Israeli economy saw a strong rebound in the fourth quarter of the year. This late rebound led to a modest 1% expansion of real GDP in 2024 relative to the previous year,” it states. The current review does not mention it, but Moody’s previous growth estimate for 2024, in September last year, was just 0.5%.

Moody’s sees any rating upgrade for Israel as being a long way off. “Given the negative outlook, an upgrade to the rating is unlikely. We may stabilize the outlook if there are clear prospects for a durable cooling down of the military conflicts, in turn allowing Israel’s institutions to formulate policies that support the recovery of the economy and public finances and restore security while dealing with a wide range of policy priorities,” its analysts write. At the same time, it warns that “The ratings would likely be downgraded further, potentially by multiple notches, if a full-scale conflict erupted with more material risk to Israel’s economy and infrastructure.”

As a further risk to the rating it mentions that “A material erosion of Israel’s relations with key allies including the United States (US, Aaa negative), while not our baseline, would also have a material negative rating impact for Israel.”

Published by Globes, Israel business news – en.globes.co.il – on March 26, 2025.

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