Moody’s says Israel’s economy has been weakened by ‘very high political risks’

Moody’s Investors Service warns of Israel’s “very high political risks that have weakened economic and fiscal strength.”

“Uncertainty over Israel’s longer-term security and economic growth prospects are much higher than is typical, with risks to the high-tech sector particularly relevant, given its important role as a driver of economic growth and significant contributor to the government’s tax take,” Moody’s says in a regular update report on the country’s credit rating. “Such negative developments would have potentially severe implications for the government’s finances and may mark a further erosion in institutional quality.”

The rating agency last year slashed Israel’s credit rating by two notches to Baa1 in light of the high geopolitical and domestic political risks the country is facing and maintained a negative outlook.

In the update, Moody’s says that the negative outlook reflects the rating agency’s view that “downside risks” on Israel’s credit score persist.

As challenges to Israel’s credit profile, the rating agency cites “very high exposure to geopolitical risks, polarized political system, which weighs on governance and policy effectiveness, [and] labor-market participation of religious minorities, resulting in high-income inequality and elevated social tensions.”

Moody’s says Israel’s credit profile “remains supported by historically strong economic resilience to shocks, high wealth levels, which provide some shock absorption capacity, a solid external position, and the government’s continued strong market access.”

“We may stabilize the outlook if there are clear prospects for a durable cooling down of the military conflicts, in turn allowing Israel’s institutions to formulate policies that support the recovery of the economy and public finances and restore security while dealing with a wide range of policy priorities,” Moody’s says.