Moody’s downgraded Israel’s credit rating on Friday, citing material political and fiscal risks for the country from its war with the Palestinian militant group Hamas.
The impact of the conflict raises political risk and weakens Israel’s executive and legislative institutions, and its fiscal strength for the foreseeable future, said Moody’s, which had begun the review for a downgrade on Oct. 19.
The country’s rating was cut to “A2,” which is five notches above investment grade, while its credit outlook was kept at negative by Moody’s, meaning a further downgrade is possible.
The war between Israel and Hamas, which has raged since Oct. 7, is the latest in a conflict between Israelis and Palestinians that has rumbled on for seven decades and destabilized the Middle East.
“While fighting in Gaza may diminish in intensity or pause, there is currently no agreement to end the hostilities durably and no agreement on a longer-term plan that would fully restore and eventually strengthen security for Israel,” Moody’s said in a statement, opens new tab on Friday.
The agency expects Israel’s debt burden to be “materially higher” than projected before the conflict and defense spending to be nearly double the level of 2022 by the end of this year in its baseline scenario.
Israel has carried out an air and land offensive on the Gaza coastal strip after Hamas militants killed 1,200 people and took 253 hostages.
Gaza’s health ministry says at least 28,064 Palestinians have been confirmed killed, with thousands more feared buried under rubble.
There has been one truce to date, lasting a week at the end of November.
“While there are currently negotiations underway to secure the release of the hostages against a temporary ceasefire and more humanitarian aid into Gaza, there is no clarity on the likelihood, time frame and durability of such an agreement,” Moody’s said.
Israeli forces geared up on Friday for a ground assault on Hamas in the southern Gaza city of Rafah after Prime Minister Benjamin Netanyahu earlier rejected Hamas’ latest offer for a ceasefire and return of hostages held in the Gaza Strip.
More than a million people driven southwards by the Israeli bombing of Gaza are packed into Rafah and surrounding areas.
U.S. President Joe Biden has called Israel’s response to the Hamas attacks “over the top”, and the United Nations has said Palestinian civilians in Rafah needed to be protected.
Egypt has warned Israel through Western diplomats that it could scrap the 1979 peace treaty if Tel Aviv forces Palestinians out of Rafah into Sinai.