Moody's Trims Israel's Growth Forecast, Warns Weakened Institutions Could Hit Credit Rating

Moody's trimmed its 2026 growth forecast for Israel to 3.7 percent from an earlier projection of 5 percent, citing geopolitical risk and elevated defense spending, while holding the country's Baa1 credit rating steady with a stable outlook, The Times of Israel reported.

"Although the Israeli economy has demonstrated its resilience to geopolitical shocks in recent years, the fragile security environment continues to pose risks," the agency said. Moody's projected growth could rebound to 5 percent in 2027 if ceasefires with Iran, Hezbollah and Hamas hold, but it paired that relatively upbeat scenario with a pointed warning: "institutions remain strong but have weakened in recent years amid heightened political polarization and tensions between key state institutions."

The agency specifically flagged weakening judicial oversight as a trend that could eventually trigger a downgrade, a warning that landed just as the Knesset was advancing legislation to significantly curb the attorney general's authority over government decisions.

Moody's said Israel's credit profile still rests on a "dynamic economy, high wealth levels, solid external position," but noted that public finances remain under pressure from defense spending now running at a structurally elevated level of roughly 6 percent of GDP annually.