Moody’s: “Very high political risks have weakened Israel’s economic resilience”

Just hours after Israel’s state budget was approved, credit rating agency Moody’s released its periodic review of Israel’s sovereign credit rating.

The rating itself remains unchanged at Baa1, but the negative outlook persists. The agency noted that the review does not constitute a formal rating action, nor does it signal an imminent change.

The continued negative outlook is attributed to prolonged security and economic uncertainty —particularly the risk facing Israel’s high-tech sector, which Moody’s called “the main economic driver and the primary source of government tax revenue.”

The analysts warned that any deterioration in this sector could have serious consequences for state revenue and institutional integrity.

According to Moody’s, an upgrade from a negative outlook is unlikely. Such a shift would require improvement in security conditions, or “a de-escalation of military conflicts,” which would allow Israel to implement policies focused on economic recovery and fiscal realignments.

Conversely, Moody’s warned of the risk of a further downgrade if security conditions worsen or if conflict spreads into a regional war involving countries like Iran.

Still, Moody’s economists acknowledged some of Israel’s strengths: a high GDP per capita, a strong track record of economic growth, and a competitive tech sector.

Israel’s growth rates continue to compare favorably with other advanced economies. However, they warned that heavy government spending due to the war is expected to hamper growth, and pointed to demographic and labor market mismatches, especially gaps between workers’ skills and the needs of the economy.

Among Israel’s credit strengths, Moody’s listed its historical resilience to shocks, the fact that Israel lends more to foreign entities than it borrows, a deep investor base, and a strong strategic relationship with the United States. High levels of national wealth were also cited as providing a “measure of shock absorption.”

However, the agency also emphasized key challenges to Israel’s credit profile:

Back in January, following the Gaza ceasefire agreement, Moody’s had issued a note suggesting that the truce reduced the short-term risks to Israel’s economy and public spending. The agency had downgraded Israel’s rating three notches in 2024, citing the war and the government's conduct.