The credit rating agency Moody’s published an unusual unscheduled report for investors regarding Israel this evening (Tuesday), following the passage of the legislation in the Knesset yesterday.
The report warned there is a “real risk that political and social tensions will continue to harm the Israeli economy.” It also noted that the volume of Israeli high-tech investments is at a 4-year low, which is a sign that the economy is already being affected by the tensions.
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In April, Moody’s downgraded Israel’s credit rating, citing a “deterioration in governance” as illustrated by the government’s proposal to change the judicial system. The company also criticized the government’s actions, saying that promoting a broad reform without broad agreement “points to the weakening of the institutions and the lack of ability to anticipate the government’s policy.”
In a report published three months ago, Moody’s detailed what could lead to further downgrading of Israel’s credit rating. These include “if the current tensions turn into an ongoing political and social crisis with a substantial negative impact on the economy,” “a significant decrease in capital inflow into the country,” or “companies deciding to leave the country.”
The report concluded that “the outlook for Israel’s credit rating is uncertain, and there is a risk that it could deteriorate further if the political and social situation does not improve.”
Citibank: The situation in Israel is tricky and dangerous
Citibank has warned investors to be cautious about Israeli assets, citing the country’s political uncertainty as a major risk factor.
In a research note, Citibank said that the recent political developments in Israel have “challenged fundamentals” and are making investors “increasingly nervous.” The bank urged investors to “wait for better levels and calmer markets” before investing in Israeli assets.
Citibank cited a number of factors that are contributing to the political uncertainty in Israel, including the ongoing government deadlock, the upcoming elections, and the rising tensions between the government and the judiciary.
The bank said these factors are “weighing on investor sentiment” and could lead to further volatility in the Israeli markets.
Citibank’s warning comes as the Israeli stock market has been under pressure recently. The Tel Aviv 35 Index has lost more than 4% in the past month, and the shekel has weakened against the dollar.
The bank said that it expects the political uncertainty in Israel to continue in the near term. However, it said that the markets could start to recover if there is a breakthrough in the government deadlock or if the upcoming elections lead to a more stable government.
In the meantime, Citibank urged investors to be cautious on Israeli assets and to wait for better levels and calmer markets before investing.
Morgan Stanley, a major player in trading Israel’s shekel bonds, placed Israel’s rating forecast in a “negative position.” The bank said that the Knesset had taken the first step towards reducing the influence of the legal system on legislation and public policy. Morgan Stanley said it sees “growing uncertainty regarding Israel’s economic outlook in the coming months.”
Tel Aviv Stock Exchange (TASE) has seen a sharp sell-off in recent days
Tel Aviv 35 Index lost 4% in two days. The sell-off comes after a strong rally in the TASE earlier this year, as investors were optimistic about the Israeli economy. However, recent concerns about the political situation in Israel and the global economic outlook have weighed on investor sentiment.
The shekel has also weakened against the dollar recently, losing 2.77% over the past 24 hours. This is likely due to the sell-off in the TASE and the rising risk of a global recession.
Whether the sell-off in the TASE and the shekel will continue remains to be seen. However, the recent market volatility suggests that investors are becoming increasingly cautious about the global economic outlook.
Netanyahu and Smotrich dismiss Moody’s warning and strong economy
Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich dismissed Moody’s downgrade of Israel’s credit rating, saying that it is a “momentary reaction” that will not have a lasting impact on the economy.
In a joint statement, the two leaders pointed to a number of factors that they said demonstrate the strength of the Israeli economy. These include:
- A booming defense industry
- Growing gas exports to Europe
- Increased investment by foreign companies, such as Intel and Nvidia
- A tight labor market
- Rising economic growth
- Falling inflation
- Reduced regulation
- Increased competition
Netanyahu and Smotrich said Israel’s economy is “based on solid foundations” and will continue to grow under “experienced leadership that leads a responsible economic policy.”
They also criticized Moody’s decision, saying it was “based on inaccurate and misleading information.”
The downgrade by Moody’s is the latest in a series of negative assessments of Israel’s economy. S&P Global Ratings downgraded Israel’s credit rating in April, citing political instability and a weakening economy.
However, Netanyahu and Smotrich said they are confident that the Israeli economy will weather these challenges and continue growing. They said the government is “committed to taking the necessary steps to ensure the continued growth and prosperity of the Israeli economy.”
