Moody's Keeps Israel Credit Rating Stable but Warns of Long-Term Security Costs

Moody's credit rating agency decided to maintain Israel's credit rating at Baa1 with a stable outlook, avoiding a further downgrade amid ongoing security challenges. The decision, announced overnight, provides significant relief to Israel's Finance Ministry but comes with cautionary notes about the country's economic future.

The report praises Israel's economy for its resilience during wartime, highlighting strengths such as a robust high-tech sector, stable labor market, strong financial system, and good access to global capital markets. Moody's projects cautious growth of 2.9% in 2025, 3.7% in 2026, and 5% in 2027, alongside a gradual easing of inflation from around 3% in 2025 to about 2% in subsequent years, aligning with the Bank of Israel's targets.

However, Moody's warns that the war has caused a structural shift in government spending, with defense expenditures expected to rise to about 6% of GDP in the coming years, up from 4% before the conflict. This increase will constrain the government's fiscal flexibility, with deficits forecasted at 5.3% of GDP in 2026 and 4.4% in 2027, and the debt-to-GDP ratio projected to stabilize near 70%, up from 68.5% in 2025.

Despite these fiscal pressures, Moody's does not currently see grounds for a downgrade, citing Israel's economic resilience, government ability to raise capital internationally, and strong high-tech performance as balancing factors. The agency emphasizes that the main risk remains the geopolitical situation, warning that prolonged conflict, significant economic disruption, or fiscal deterioration could renew pressure on the credit rating.

Moody's also notes that weakening institutional quality or governance could negatively affect Israel's credit profile. Conversely, improvements in security, stronger growth, reduced debt ratios, and responsible fiscal policies could support future rating upgrades. Overall, while Israel has avoided a downgrade during a complex security period, Moody's underscores the ongoing challenges posed by higher defense spending, increased government debt, and tighter fiscal space ahead.