Moody’s Investors Service downgraded Israel’s credit rating on Friday, amid its continued war in Gaza.
The country, which had a credit rating of A1, has been downgraded to A2 with a negative outlook, the ratings agency said on Friday.
It previously placed the credit rating on review for a possible downgrade following the outbreak of war in October.
“The main driver for the downgrade of Israel's rating is Moody's assessment that the continuing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future,” it said.
“While fighting in Gaza may diminish in intensity or pause, there is currently no agreement to end the hostilities durably and no agreement on a longer-term plan that would fully restore and eventually strengthen security for Israel.”
Israel’s public finances are also deteriorating and the country’s debt burden is expected to be “materially higher than projected before the conflict,” Moody's added.
The Israeli military has continued its bombing campaign in Gaza, killing tens of thousands and destroying buildings, infrastructure and other assets.
On Friday, Prime Minister Benjamin Netanyahu ordered the military to come up with a plan to expel Palestinians from the city of Rafah in Gaza after rejecting a ceasefire proposal from Hamas to end the four-month long war.
Rafah is one of the few remaining places in Gaza that has not been heavily bombed.
The war began on October 7, when Hamas fighters attacked southern Israel, killing about 1,400 people and taking more than 200 hostages.
Israel retaliated with air strikes and a total siege of the enclave, with the Palestinian death toll currently at about 28,000, according to Gaza’s healthy ministry.
It is also carrying out attacks in Lebanon and Syria raising concerns that the war could engulf the entire region.
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“The negative outlook reflects Moody's view that downside risks remain at the A2 rating level. In particular, the risk of an escalation involving Hezbollah in the North of Israel remains, which would have a potentially much more negative impact on the economy than currently assumed under Moody's baseline scenario.”
Last month, Hezbollah chief Hassan Nasrallah warned the Israelis against escalating the conflict on the Lebanon-Israel border and said the settlers of northern Israel would be the “first to pay the price of a war” on Lebanon.
In the coming years, Israel's budget deficit will be significantly larger than expected before the conflict, Moody’s said.
The Bank of Israel estimates the cost of the conflict for the years 2023-2025 to stand at about 255 billion shekels ($64.4 billion) or 13 per cent of the 2024 forecast gross domestic product, which includes both higher defence and civilian spending as well as lower tax revenue.
In its baseline scenario, Moody's expects Israel's defence spending to be nearly double the level of 2022 by the end of this year and to continue to rise by at least 0.5 per cent of GDP in each of the coming years, with risks tilted towards yet higher defence spending.
