Moody’s warns Israel’s economy has been weakened by ‘very high political risks’
Credit agency cites risks to high-tech sector, ‘given its important role as a driver of economic growth and significant contributor to the government’s tax take’
Moody’s Investors Service warned Tuesday of Israel’s “very high political risks that have weakened economic and fiscal strength,” amid financial jitters over the renewal of the government’s contentious judicial overhaul and the restarting of fighting in Gaza.
“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 said 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 agency said.
Both Fitch and Moody’s over the past year lowered Israel’s credit score and maintained a negative outlook, warning that the country could be facing further downgrades.
In Tuesday’s update, Moody’s said 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 cited “very high exposure to geopolitical risks, and a 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,” an apparent reference to the Arab and Haredi communities.
However, Moody’s said 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 said.
Moody’s in September cut Israel’s credit rating by two levels from A2 to Baa1, citing “diminished quality of Israel’s institutions and governance” to manage state finances, and increased spending needs during the war period. A lower rating raises credit costs for the government, businesses and households.
Prime Minister Benjamin Netanyahu’s hardline government, including far-right Finance Minister Bezalel Smotrich, have in the past accused the rating agency of downgrading Israel’s status due to “pessimistic and unfounded” reasoning.
In September 2023, Netanyahu met with representatives of Moody’s and reportedly told the credit ratings agency that further elements of the judicial overhaul would only pass with broad public support.
However, he had in the past given similar assurances to the international community before his government went on to pass the first overhaul law.
The Moody’s statement came a day before the coalition was set to bring highly controversial legislation for final votes at the Knesset that would greatly increase political control over the judicial appointments process in Israel, and dramatically reduce the influence of the judiciary over appointments to the Supreme Court.
The voting is set to come on the heels of the coalition’s approval of the 2025 budget, in a major boost to the stability of Netanyahu’s government as general elections would have been called if the budget had not passed before March 31. Opposition leader Yair Lapid termed the budget “the greatest robbery in the history of the country.”
The overhaul legislation set for a vote on Wednesday would increase the number of political representatives on the nine-member Judicial Selection Committee.
It would also give political representatives from the coalition, opposition and judiciary veto over lower court appointments, as opposed to the current system where no side has a veto.
And the bill would remove all influence of the three judges on the committee over appointments to the Supreme Court while granting the coalition and opposition veto.
The attorney general, three former Supreme Court presidents and opposition parties have argued that the changes will politicize the judicial appointments process and the judiciary itself.
Furthermore, the government’s decision to fire Shin Bet chief Ronen Bar and Attorney-General Gali Baharav-Miara has led to widespread protests and warnings of potential strike action by unions and the private sector.
In addition to the internal political turmoil, Israel is also facing the potential rising financial burden caused by a return to fighting in Gaza and with the renewal of attacks from Yemen and Lebanon.
In January, Moody’s said a durable ceasefire with the Hamas terror group in the war in Gaza would reduce “downside risks to Israel’s economy and public finances.”
The credit rating agency noted that “if adhered to and further progress is made” on the Gaza ceasefire and hostage release deal that had recently come into effect, it would also lower the “tail risks for the Middle East region from an escalation that involves Iran, and the conflict’s spillover effect on global supply chains from Red Sea shipping disruptions.”
“However, the terms of the ceasefire agreement are limited in scope and duration currently… further negotiations will be required to secure a permanent cessation of hostilities and durably lower regional geopolitical tensions,” said Moody’s senior analyst Christian Fang.
Fang raised concerns that “domestic political challenges and security concerns are hurdles for Israel that may impede further progress.”
The ceasefire collapsed a few weeks later.
Sharon Wrobel and Jeremy Sharon contributed to this report.
The Times of Israel Community.