Despite the costly summer war in Gaza, Israel’s economy is still in good shape, as far as international credit rating agency Moody’s is concerned. In a report issued Wednesday, Moody’s maintained Israel’s previous A1 stable outlook. Economic growth, entrepreneurial dynamism, and a stable political system ensured that Israel would remain a good risk for investors, the agency said. A1 is among Moody’s highest ratings.
Moody’s report completes a positive “triple crown” of post-Gaza war ratings for the country by agencies. Last month, S&P gave Israel an A+ Stable rating, and Fitch assigned Israel an A Positive rating. The ratings mean that the agencies believe Israel’s debts are “judged to be upper-medium grade,” subject to low credit risk. Most countries outside North America and Western Europe, except for China, Australia, and the Gulf states, are rated lower by all three agencies.
Ratings by Moody’s and the other agencies are not just indicators of how an economy is doing. They are a key factor in how much a country will have to pay to finance its expenses. A higher agency rating means that a country can borrow money at lower interest rates from international banks and agencies, and it can pay lower interest rates on bonds and other obligations it sells. Countries with lower ratings are riskier investments – meaning that there is a greater chance that investors won’t get all their money back – and they have to pay more both to banks and investors in order to attract capital.
In its report, Moody’s acknowledged the effects of Operation Protective Edge. “Israel’s extensive geopolitical challenges continue to constrain the ratings,” the agency said. “These include territorial disputes with the Palestinians, intense civil strife in Egypt and Syria and the stand-off with Iran over its nuclear program. Intermittent conflicts pose near- to medium-term risks for the public finances and impair Israel’s standing in the international community.”
That, the agency said, was one reason why, despite having so much going for it, Israel has not yet broken to the level of “high grade” investment. The country’s rating could be downgraded “in the event that geopolitical developments appear to pose heightened challenges to Israel’s economic stability and result in a significant deterioration of the public finances.”
The war is not completely to blame, however. Growth started to slow this year even before the latest conflict with Hamas in Gaza, mainly because of the negative impact on exports of a steeply appreciating currency, the agency said. The Gaza conflict will put a significant dent in third quarter growth, further weighing on the overall forecast for 2014.
Another danger to the current high ratings, Moody’s said, is the possibility that Israel would “lose its financial discipline.” The rating outlook “could be lowered to negative if the commitment to fiscal discipline, in particular the consensus around fiscal consolidation, were to wane.” That might become an issue in the future, given Finance Minister Yair Lapid’s plan to raise deficit spending and to keep his promise of “no new taxes.”
For now, though, Israel’s economy is, if not on “easy street,” moving forward on a positive, upward path. “Growth is likely to pick up next year due to the impact of easier monetary policy and the associated weakening of the shekel since late July. Israel will benefit from stronger growth of the US economy, its most important trading partner, and the more modest pickup in European growth,” said Kristin Lindow, a senior vice president at Moody’s.
Giving a big boost to that growth, the agency said, is “Israel’s economic dynamism as a high-tech export sector that benefits from the country’s well-educated, relatively young population, as well as one of the highest levels of per capita investment in research and development. Foreign capital inflows are also substantial, as evidenced by the recent decision of Intel to build its $6 billion new chip plant there.” Overall, Moody’s said, Israel’s positive rating and stable outlook “are underpinned by its resilient growth model and effective governance.”