Credit rating agency Moody’s has lowered the growth forecast for Israel’s economy, citing concerns over heightened defense spending amid geopolitical risks, while cautioning about a weakening of the country’s institutions.

“Although the Israeli economy has demonstrated its resilience to geopolitical shocks in recent years, the fragile security environment continues to pose risks to the economic and fiscal outlook,” Moody’s cautioned in a report released late on Tuesday.

Moody’s maintained Israel’s medium-grade Baa1 credit rating alongside its stable outlook, but cut the country’s growth outlook for the economy for this year to 3.7%, down from a previous 5%. The forecast is lower than the Bank of Israel’s prediction, which sees the economy growing by 4% in 2026, following 2.9% last year.

“While ceasefire and peace arrangements have been signed across several fronts, episodes of renewed hostilities underscore their fragile and tenuous nature, and we continue to assume that implementation will remain incomplete and that periodic violations and flare-ups are likely, keeping geopolitical risk as the principal constraint on Israel’s sovereign credit profile,” Moody’s said.

“Downward pressure on the rating would likely build if geopolitical tensions increased again in a way that pointed to a lasting significant negative impact on the economy or the government’s finances,” the credit rating agency warned.

Earlier this year, Moody’s upgraded Israel’s credit outlook from negative to stable, amid expectations for a “strong post-war rebound,” assuming that geopolitical........

© The Times of Israel