Israel’s political stalemate impacts economy more than Hamas rockets – Moody’s

Ratings agency sees latest bloody conflict as having ‘limited economic implications,’ but the violence hampering efforts to build a government is a ‘negative’

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Hamas rockets and Iron Dome interceptors light up the night sky over the northern Gaza Strip on May 14, 2021.(Photo by MOHAMMED ABED / AFP)
Hamas rockets and Iron Dome interceptors light up the night sky over the northern Gaza Strip on May 14, 2021.(Photo by MOHAMMED ABED / AFP)

Israel’s latest conflict with Hamas, “one of the worst flareups of violence in recent years,” will have “limited economic implications” for Israel’s economy, though the extended political instability that is gripping the nation is a “credit negative,” ratings agency Moody’s Investor Service said in a report.

“Given the long-standing resilience of the Israeli economy to geopolitical developments, we expect the heightened conflict to have only a modest impact on the country’s economic recovery from the pandemic and on the government’s near-term fiscal metrics,” the May 19 report said.

“However, the violence risks further complicating efforts to assemble a stable majority coalition government, which would have negative implications for both the elaboration of an effective post-crisis fiscal strategy and the implementation of wider structural reforms.”

In the past, the Israeli economy has been “highly resilient” to the various security threats and episodes of conflict, the report noted.

Security forces at the scene where a fragment of a rocket fired from the Gaza Strip landed in the southern Israeli city of Ashdod, on May 19, 2021 (Flash90)

Israel saw an estimated economic loss from the 2014 50-day Gaza conflict known as Operation Protective Edge, that the report said was “modest at around NIS 3.5 billion (0.3% of GDP), largely through lower tourism revenues and consumption.”

The economy bounced back in the subsequent quarter, making up for the downturn.

A similar pattern of resilience has been observed in other previous periods of hostilities, the report said.

“As such, we do not expect the current events to materially disrupt Israel’s robust economic recovery, which will remain supported by rapid vaccination progress and a strong pre-pandemic macroeconomic position,” Moody’s said, forecasting growth at close to 5% this year, after a contraction of 2.6% in 2020 amid the pandemic. The economy shrank 1.7% in the first quarter of this year, but growth is expected to accelerate in  the summer, the report said.

Sectors such as tourism and hospitality – already hardest hit by the pandemic – are likely to be more negatively affected by the conflict, but account for a relatively small share of the economy.

The heightened tensions with Gaza, however, risk further prolonging the nation’s “long-standing political deadlock,” which is a “negative” for Israel’s credit rating, Moody’s said.

“The political deadlock and volatile political environment have already hampered effective fiscal policymaking over recent years, prevented the passing of a budget, and prolonged reform inertia,” the report said. “As a consequence, we expect Israel’s debt burden will continue to rise over the coming years to around 80% of GDP by 2024 (from 60% of GDP in 2019).

“Israel’s deep and highly developed domestic market as well as exceptional access to external markets – also through an active diaspora bond program – will support debt affordability. However, any deficit-reduction strategy will be challenging to advance if the next governing coalition is not able to command sufficient internal consensus.”

In April, Moody’s left Israel’s credit rating unchanged at A1 stable.

On May 14, S&P affirmed its AA-/A-1+ rating with a stable outlook for Israel, even after the flare-up of hostilities with Hamas.

“The combination of a very effective and swift vaccination campaign against COVID-19, strong technology sector performance, and rising gas exports should still underpin solid GDP growth of 5.0% in 2021,” the ratings agency said.

“This forecast assumes that the current military confrontation and domestic tensions gradually subside and do not become protracted,” the report said.

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