On February 9, 2024, international credit rating agency Moody’s downgraded Israel’s credit rating from A1 to A2, which means it was rated as upper-medium grade and low credit risk.
This was the first time Israel’s rating had been lowered since it began being evaluated in 1998. The downgrade is significant and could have several economic implications for the country.
Moody’s cited the prolonged war in Gaza and its financial, political, and social consequences as the main reason for the downgrade. The agency believes the conflict weakens Israel’s institutions and raises both political and security risks.
The war has put a strain on Israel’s finances, increasing government debt and potentially hindering its ability to meet future obligations.
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Potential Impacts
Higher borrowing costs: With a lower credit rating, Israel may face higher interest rates when borrowing money, both domestically and internationally. This could impact government spending and potentially raise borrowing costs for businesses and individuals.
Currency fluctuations: The downgrade could lead to temporary fluctuations in the shekel’s value against foreign currencies.
Investor sentiment: A lower credit rating may make some investors less confident in the Israeli economy, potentially impacting foreign investment.
Domestically: Higher borrowing costs could impact government spending and increase business loan rates, potentially slowing economic growth.
Internationally: Reduced investor confidence could lead to lower foreign investment and potentially affect exports.
Reduced foreign investment: A lower credit rating could deter foreign investors from investing in Israeli bonds and businesses, potentially hindering economic growth.
Increased political instability: The economic pressure from the downgrade could exacerbate existing political tensions and contribute to social unrest.
Impact on the peace process: Some analysts argue the downgrade could complicate future peace negotiations as it could raise concerns about Israel’s long-term economic and political stability.
Prime Minister Netanyahu downplayed Moddy’s downgrade, attributing it solely to the war and predicting an improvement upon its conclusion. Critics argue this stance overlooks underlying structural issues.
The agency acknowledged Israel’s economic strengths but emphasized the long-term impact of the conflict on political stability, institutions, and fiscal health.
While there were minor fluctuations in the shekel’s value and some analysts expressed concern, overall market reaction has been muted.
Moody’s negative outlook indicates a potential for further downgrades if the war persists or other negative developments arise.
Key factors to monitor include the duration and intensity of the conflict, progress towards a sustainable peace agreement, and the government’s ability to manage rising debt and maintain fiscal discipline.
Potential Economic Impacts
The Israeli government has announced plans to increase taxes and cut spending to address fiscal challenges.
Success in de-escalating the conflict and achieving a durable peace agreement would significantly improve investor confidence and economic prospects.
Implementing structural reforms to strengthen institutions and improve fiscal sustainability could also contribute to a positive credit rating revision.
