Moody's Signals Israel Is Far From Credit Rating Upgrade Amid Security and Fiscal Concerns

Moody's Investors Service released an analytical review of Israel's credit rating outlook, reflecting the agency's current thinking without changing the rating itself. Moody's maintains Israel's credit rating at Baa, the lowest among the three major rating agencies, compared to an A rating with a negative outlook from S&P and Fitch. The review highlights Israel's strong economic and fiscal resilience but expresses concerns over security risks, fiscal pressures, and institutional and social challenges.

Moody's forecasts Israel's GDP growth at 3.7% in 2026 and 5% in 2027, slightly lower than Bank of Israel's projections of 4% and 5.5% respectively. The agency expects public debt to rise modestly to around 70% of GDP in 2026 and 2027, with deficits of 5.3% and 4.4% in those years, more pessimistic than government estimates but similar to earlier Bank of Israel forecasts.

The rating assessment is based on four components: economic resilience, institutional strength, fiscal strength, and sensitivity to risk events. Israel scores relatively high on economic resilience (a1) and institutional strength (a3), though both have declined since before the recent conflict. Moody's warns that political polarization and ongoing judicial reforms could weaken institutional strength further, potentially triggering a downgrade.

Fiscal strength is rated lower, reflecting high deficits, rising public debt, and increasing defense expenditures, which Moody's estimates will stabilize at about 6% of GDP, or 140-150 billion shekels by 2027. While Israel benefits from strong debt management and access to global capital markets, rising security and budgetary costs pose significant risks to the rating.

The most critical weakness is Israel's sensitivity to risk events, rated lowest among all categories. Persistent security threats from Iran, Hezbollah, and Hamas keep Israel's credit profile fragile. Moody's expects the security situation to remain tense, weighing heavily on the credit rating. Additionally, Israel received a low ESG (environmental, social, governance) score of cis-4, reflecting governance concerns due to institutional weakening and social tensions exacerbated by the security environment.

Overall, Moody's analysis underscores that while Israel's economy and institutions remain resilient, ongoing security challenges and fiscal pressures limit the potential for a credit rating upgrade in the near term.