Israel: Rating agencies Moody’s and S&P have downgraded the country’s sovereign rating one after the other

Not a surprise, but it remains exceptional on three counts: – It occurs outside the traditional calendar – It consists of an unprecedented reduction of two notches from A2 to Baa1 – The negative outlook remains in effect. On October 2, S&P followed Moody’s in downgrading Israel’s sovereign rating from A+ to A with a negative outlook. Following Fitch’s downgrade from A+ to A in August, the three agencies are now broadly aligned.

The reasons given by Moody’s and S&P focus on the implications of a war that is increasing in intensity and duration, increasing security and geopolitical risks. Moody’s anticipates risks to Israel’s solvency in the short and long term. It notes a weakening of the economy, fueled by the deterioration of the fiscal situation, the delay in preparing the 2025 budget, uncertainty about the “day after” in the conflict, and the government’s lack of plans. S&P predicts that security threats will shake consumer and investor confidence, while the construction, agriculture and tourism sectors are recording low levels of activity. A large-scale ground operation in Lebanon could also limit the economic recovery in the short term by massively mobilizing reservists.

Moody’s forecasts real GDP growth of 0.5% in 2024 and has revised downwards its potential growth forecast for 2025, to 1.5% instead of 4% (respectively 0% in 2024 and 2.2% in 2025 for S&P). Both agencies consider the government’s objective of a budget deficit limited to 6.6% of GDP in 2024 to be implausible. Moody’s expects it to exceed 7.5% by the end of the year (9% for S&P). Finally, Moody’s and S&P predict an increase in the public debt/GDP ratio to 70% in 2025. Under pressure, the government will have to quickly present a budgetary framework for 2025 that will reassure the markets. At the end of the monetary committee on October 9, the governor of the Central Bank called for serious consideration of the signal from the rating agencies.

To restore investor confidence, the Accountant General of the Ministry of Finance and the Central Bank urged the government to approve the 2025 state budget as soon as possible and to prioritize investments in growth drivers and infrastructure despite the war. With a delay of almost two months, budget discussions were indeed initiated at the end of the summer, but the government is still struggling to consolidate the 2024 budget due to increased defense spending. Source: French Embassy in Israel