Moody’s explains risks of deterioration of Israel’s credit rating after downgrade
Rating agency worries about high level of uncertainty around Israel’s long-term security and the impact of government policies, political decisions on economic growth prospects
Sharon Wrobel is a tech reporter for The Times of Israel.
Moody’s Investors Service said Monday that the key triggers for the harsh move to lower Israel’s credit rating by two notches are high geopolitical and domestic political risks, while raising concerns about the long-term impact of the prolonged war on the country’s economy and public finances.
Moody’s cut Israel’s credit rating for a second time this year on Friday, just as the military carried out a major strike in Beirut that killed the Hezbollah terror group’s leader Hassan Nasrallah. While the Moody’s announcement was published shortly afterward, the agency had prepared it beforehand.
Speaking with investors after Friday’s downgrade, Moody’s acknowledged that Hezbollah has been weakened in recent days, following a “big military success.” However, the rating agency said it is still very much concerned that Israel has no real exit strategy from the military conflict that would restore a level of certainty and security for Israel in the future, which it said is ultimately essential for investments in the country.
In addition, Moody’s criticized the political choices of the Israeli government that increase the risk of formal and informal trade restrictions, and the risk of losing vital international diplomatic support.
Talking about the domestic political risks, Moody’s lamented that the government was pursuing policies that add to already high social tensions in the country, citing as examples settler violence in the West Bank that is seen by the security services as increasing security risks for Israel, and the justice minister attempting again to undermine the independence and strength of the judiciary by delaying important appointments.
Asked about whether an improvement in the security level, including removing the threat from Lebanon through a short war, would be a factor to upgrade Israel’s credit rating, Moody’s said it was unlikely, as the agency sees that the longer-term issues facing the country are not going away.
Moody’s does not expect Israel’s credit rating to go back up very fast, citing a very high level of uncertainty around the country’s longer term security prospects. Alongside Israel’s uncertain security prospects, the rating agency projects that growth will not bounce back quickly to where it was before the outbreak of war on October 7, as defense spending will be much higher and public finances and the economy will remain weaker than previously expected.
On the subject of state finances and their management, Moody’s raised skepticism whether all the coalition partners in the government are on board for the fiscal tightening that is necessary to finance and offset the costs of the ongoing war in a responsible manner in the coming year. Moody’s criticized the government for again raising the expenditure ceiling for the 2024 state budget instead of compensating the needed funds with spending cuts elsewhere to keep within the ceiling as advocated by officials in the Finance Ministry.
Among drivers for further downgrades in the country’s credit rating, Moody’s listed a broader escalation of the conflict involving Iran, or a more severe impact on the economy or public finances.
