Moody's Affirms Israel's Credit Rating, Raises Growth Forecast Amidst Political Uncertainty

International rating agency Moody's has affirmed Israel's credit rating at Baa1 with a stable outlook, following the recent Knesset elections. The agency has also raised its forecast for Israeli economic growth, projecting 5% for 2026, up from 3.7%, and 6% for 2027, up from 5%. However, Moody's cautioned that these figures do not reflect a corresponding improvement in domestic economic activity, attributing the revised forecast primarily to a change in methodology by the Central Bureau of Statistics. The bureau now more fully incorporates the contribution of Israeli companies' overseas production to GDP, driven by a surge in high-tech exports linked to the artificial intelligence boom.

Moody's referenced projections from the Bank of Israel, which anticipates 5.6% growth in 2026 and 7.5% in 2027. Yet, excluding overseas production, these figures drop to 3.4% and 5.1% respectively, leading Moody's to conclude that the rapid expansion of this segment distorts the picture of internal economic activity.

The agency also improved its assessment of the state budget deficit for 2026, lowering the forecast from 5.9% to 5% of GDP, and reduced the projected government debt-to-GDP ratio from 70.1% to 68.5%. These improvements are largely due to higher-than-expected budget revenues. For 2027 and 2028, Moody's forecasts deficits of 4.8% and 4.3% of GDP, respectively, anticipating a decrease in defense spending, though it notes such spending will remain structurally high.

Moody's stated that the composition of the next Israeli government is unlikely to immediately impact the country's creditworthiness, as the economic, fiscal, and defense policies of the main parties are largely similar. The primary risk to creditworthiness post-election, according to the agency, is the weakening of institutional stability. Continued measures that undermine judicial independence and the system of checks and balances could further downgrade Moody's assessment.

Furthermore, Moody's suggested that a government led by Benjamin Netanyahu would likely continue the current course, potentially increasing international tensions. Conversely, a government led by an opposition figure might show greater willingness towards diplomatic solutions. The agency highlighted that a policy shift regarding Gaza, Judea and Samaria, Lebanon, and Iran could help restore international relations and positively affect Israel's creditworthiness.