Moody's downgrades Israel's credit ratings amid ongoing conflict with Hamas

Moody's Investors Service (Moody's) announced on Friday a downgrade of Israel's foreign-currency and local-currency issuer ratings, as well as its foreign-currency and local-currency senior unsecured ratings, from A1 to A2. 

This decision follows a review initiated by Moody's on October 19, 2023. The outlook is negative, indicating potential further downgrades in the future.

One of the main reasons for the downgrade is the ongoing military conflict with Hamas, which has increased political risk for Israel and weakened its institutions and fiscal strength. 

Despite potential pauses in fighting, there is currently no durable agreement to end hostilities or establish a long-term security plan. This uncertainty has led to higher social and security risks and deteriorating public finances.

The downgrade also considers Israel's economic strengths, such as its diversified economy and solid banking sector. However, it notes that fiscal and debt metrics were already weaker than many similarly-rated sovereigns before the conflict.

Looking ahead, Moody's sees continued downside risks, particularly regarding the potential escalation of conflict with Hezbollah in the North. This could have severe economic and financial repercussions for Israel.

The assessment also considers environmental, social, and governance (ESG) factors, noting moderate exposure to environmental risks and elevated social risks linked to the conflict.

Overall, the consequences of the conflict in Gaza are expected to impact Israel's credit profile for an extended period, with the potential for further negative effects on institutions and public finances.