In a webinar held by Moody’s following the downgrade of Israel’s credit rating to “Baa1” with a negative outlook, Catherine Muelbrunner, Senior Vice President of the Sovereign Risk Group at Moody’s, explained the factors that influenced the downgrade decision, according to Reported by the Israeli newspaper Globes.
The symposium addressed Moody’s concerns about the current Israeli war, internal political tensions, and the economic outlook, suggesting that a clear exit strategy from the war is critical to achieving future economic stability.
Muelbrunner explained that the absence of a clear exit strategy from the current conflict was one of the main reasons for the credit rating downgrade.
She stressed that this absence creates a state of uncertainty for investors and hinders sustainable economic growth.
In contrast to previous tensions, Muehlbroner expects the pace of economic recovery this time to be slower and more complex, according to Globes.
Internal political risks
The analyzes also pointed to significant domestic political risks. According to Muehlbrunner, the current government’s actions have increased social tensions, which could threaten international support for Israel.
It specifically highlighted issues such as the actions of Jewish settlers in the West Bank, attempts to reduce the independence of the judiciary, and the delay in passing the conscription law for the Haredim (Orthodox Jews).
She described these issues as factors that could negatively affect Israel’s international standing and economic stability.
Worrying economic forecasts
Moody’s presented alarming economic forecasts during the symposium, after it significantly reduced its forecast for Israel’s growth in 2025 from 4% to only 1.5%, and its long-term growth forecast was reduced from 4% to 3% annually.
This significant decline indicates expectations that the economic recovery will be slower than expected.
Regarding Israel’s financial situation, Muelbrunner expressed her concerns about the expected budget deficit. It estimated that the deficit in 2025 would be 2% higher than the government’s stated target, reaching about 6% of GDP.
This rise, according to Moody’s, is due to slow economic growth and doubts about the government’s ability to implement the proposed financial control measures.
As a result, government debt is expected to rise to 70% of GDP in the coming years, a figure much higher than previous estimates, according to Globes.
Despite the negative outlook, Muelbrunner pointed to some strengths of the Israeli economy, including large foreign currency reserves, a stable banking system, and diverse sources of increased debt.
However, the Moody’s official expressed doubts about Israel’s ability to quickly return to the security and economic conditions it enjoyed in the past, stressing that the current challenges it faces are greater and more complex.
