Moody’s Investors Service (Moody’s) – the internationally renowned credit ratings agency – at the end of last week placed the Government of Israel’s A1 long-term foreign-currency and local-currency issuer ratings on review for downgrade. This is a direct result of the war going on in Gaza.
Moody’s also placed on review for downgrading Israel’s A1 foreign-currency and local-currency senior unsecured ratings and its (P)A1 foreign-currency senior unsecured shelf and senior unsecured MTN program ratings.
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Since the start of the “Iron Swords War,” the New Israel Shekel (NIS) fell to an eight year low against the $US and other major currencies falling to below the 4 Shekel to the Dollar mark.
Moody’s even spelled it out that way saying that it initiated this review because of the “unexpected and violent conflict between Israel and Hamas, in response to a large-scale, multipronged attack by Hamas.”
The firm added that the “most important consequence is the human cost arising from loss of life. This rating announcement addresses the credit implications of recent events.”
This move comes after another credit rating firm Fitch made a similar one just last week when it placed Israel’s A+ long-term foreign and local currency Issuer Default Ratings (IDR) on Rating Watch Negative (RWN), which means the firm is warning investors to be prepared for the possibility of trouble ahead for Israel.
Fitch also placed the short term foreign and local currency IDRs of F1+ and the issue ratings of A+ on Israel’s long term foreign currency senior unsecured bonds have also been placed on RWN.
It was in July that Moody’s expressed concerns for the future stability of Israel’s economy, but then the issue was domestic strife over the government’s controversial judicial reform plans. At that time Moody’s warned there is a “real risk that political and social tensions will continue to harm the Israeli economy.”
Now, Moody’s explains Israel has experienced domestic political tensions for some years, which it said have posed “challenges to effective policy-making.”
“The formation of a unity government following the onset of military conflict will likely support greater domestic cohesion for the duration of conflict,” Moody’s added. “The review will assess the government’s ability to implement policies to mitigate the economic and fiscal impact of the conflict, and orchestrate a future recovery from the crisis.”
Moody’s said that it will also assess whether the conflict will interrupt or reverse the previously expected positive trends in debt metrics. Israel spends around 4.5% of GDP on defense, considerably more than other OECD countries.
“While defense spending has declined as a share of GDP over the past two decades, it has typically increased around episodes of violence in the past,” explained the firm. “It will probably do so as part of the current conflict. Higher defense spending would add to the deficit, which Moody’s expected to stand at around 2% of GDP prior to the attack.”
