Moody’s – Why did Moody’s lower Israel’s rating?

Moshe Maimon, editor of the FUNDER website

10/02/2024

Summary of Moody’s announcement

The main reason for downgrading Israel’s credit rating is Moody’s assessment of the consequences of the ongoing military conflict with Hamas, for its wide-ranging consequences, which substantially raise a risk to Israel and weaken the various institutions, the legislature and its fiscal strength. of Israel, in the foreseeable future.

The fact that the fighting is going on without a direction to end, including in the absence of a long-term plan that will restore and ultimately strengthen Israel’s security. This places a burden on the state budget and may change the trend of reducing Israel’s national debt.

Moody’s noted the long-term strengths of the Israeli economy. Diverse economy, high income and durability. Very high effectiveness of monetary policy, and high liquidity situation and access to the markets, of the government.

The negative forecast reflects Moody’s view that there is a high risk that the conflict will intensify or spread to northern Israel, and will have a more severe impact on Israel’s economy and budget. In the baseline scenario, Moody’s expects a doubling of security spending from the level it was in 2022, and a continued increase in spending in each of the coming years.

The rating agency notes that even if a plan is eventually agreed upon, the level of uncertainty regarding security aspects in Israel will still remain high in the medium-long term.

Moody’s express fear of unrest and internal political upheaval along with increased polarization, once the current government and the existing cabinet are dissolved.

Moody’s indicated that it would stabilize the economic outlook if there is evidence that the government is able to formulate policies that support economic recovery, while restoring security and dealing with a variety of political priorities. If the situation in the north escalates, Moody’s will lower the rating, currently Moody’s states that this is the likely scenario.

Moody’s provided policymakers with quite a few guidelines

The rating notice indicates between the lines some insights that can be used as guidelines for further action.

The monetary policy of the Bank of Israel. It is no secret that the Bank of Israel conducts a successful monetary policy, and until now was almost the only body that provided security and stability to the financial markets. Moody’s points positively to the policy of the Bank of Israel, and there is no doubt that giving the governor another term was a good decision, even if it was done crookedly.

The political unrest. Moody’s are aware of the fact that Israel entered the war completely divided, and express fear that after the unity government falls apart, the country will fall into unrest, which will harm political stability in Israel and even worse, lead to the paralysis of institutions and possibly harm Israel’s economy.

Fiscal policy. Moody’s provides the government with lines and guidelines and says, if you take this terrible crisis and use it to bring about reforms that will help in the fiscal field, it will have a positive effect. That is, it will prevent another downgrade.

In conclusion, it is very worthwhile for the policymakers to read the main points of the short report, a single number of pages, look beyond the words, and to the horizon, and do what is necessary to prevent further downgrading of the Israeli economy.