Moody's representatives will hold a series of online meetings with senior officials from Israel's Finance Ministry and economic sector in the next few days, as they get ready to announce credit ratings.
Although Israel is likely to emphasize that they have renewed their budget discussions, the meetings are taking place amid disappointing macroeconomic indicators for Israel.
In February, Moody's became the first credit rating agency to ever downgrade Israel’s rating. Since then, competing agencies like S&P and Fitch have followed suit. Moody's downgraded Israel’s rating from A1 to A2 with a negative outlook, and if this outlook materializes, Israel’s rating could drop further to A3, which is equivalent to an A- rating in terms of other agencies.
What will influence the decision?
Moody's analysts are reassessing Israel's rating amidst various economic developments, which could sway the decision either way.
Israel plans to highlight the renewed 2025 budget discussions, which, according to Finance Minister Bezalel Smotrich, will revolve around a relatively restrained 4% deficit, and indicate of the government's fiscal responsibility.
In a review published by Moody’s in May, the agency warned that a broad military conflict, particularly with Iran or its proxies like Hezbollah, could have significant implications for the country’s credit rating. While this extreme scenario has not yet materialized, ongoing fighting along the northern border continues, which could theoretically support maintaining the current rating.
However, the discussions are occurring at a time when disappointing macroeconomic data for Israel is being released. GDP per capita shrank by 0.4% in the second quarter compared to the previous one, and the Finance Ministry has revised its growth forecasts downward. In parallel, the monthly deficit report, expected later today, is likely to show a continued rise in the state's overdraft.
Moody's commented in its May review that the rating could drop again if it becomes clear that "Israel’s institutional capacity is even more limited than currently estimated, due to the need to focus on national security."
In addition, a significant increase in the likelihood of a larger negative impact on the country's economic and fiscal resilience in the medium term, compared to the company’s current projections, would exert additional downward pressure on the rating.