Thirty-six years ago, the global credit rating companies began to rank the Israeli economy (the first was S&P, followed by Moody’s, and then Fitch), and since then the ratings of Israel’s economy have steadily improved, and never declined. On February 8, 2024, Moody’s announced for the first time ever that it had downgraded Israel’s credit rating, and furthermore, it announced a “negative outlook,” meaning that there is a significant probability of a further downgrading in the near future. This constitutes a severe blow for Israel not only in the economic context: we live in a world where the security, political, economic, and social dimensions are intertwined, and determine jointly the fate of countries.
Moody’s report refers not only to the war and its immediate economic consequences, but also to wider contributing factors. Among them: the lack of a political horizon or a clear plan for “the day after” the war; the refusal of the Israeli government to seriously consider the US for a “grand deal,” including normalization with Saudi Arabia; the political instability that afflicts Israel, particularly if the war cabinet dissolves as expected; the prospect of renewed political polarization and social unrest; the weakening of the state institutions, particularly the executive and legislative branches. The report explicitly states these factors as having increased Israel’s economic and political uncertainty and the consequent risks, thus casting doubt on Israel’s ability to recover from the entanglement in which it finds itself.
At the same time, the report praises the resilience of the Israel’s economy; the independence of its judicial system which, together with civil society, prevented the judicial reform; and the sound policies of the Bank of Israel and the stability of the banking system. It is interesting to note that these praises go to the same institutions that politicians used to scorn until not long ago, and even during the war.
The downgrading by Moody’s means that the Israeli economy is seen as increasingly risky, and therefore that the risk premium on Israel’s debt will rise accordingly (the risk premium has already increased with the war, but the downgrade further validates it). The consequence is that a larger share of the state budget will be devoted to interest payments, at the expense of all other expenditures, from defense to education and health. Furthermore, Israeli firms will also face higher interest rates for their loans, certainly those firms that operate in international markets. Thus, the lowering of the rating has very tangible economic consequences, affecting the well-being of all Israelis.
The report also expresses serious concern about Israel’s northern front, citing estimates by the Ministry of Finance that the national product might shrink by 1.5% (that is, negative growth) in the event that a war with Hezbollah develops, and it warns of the fateful consequences of such a scenario.
The rating companies regularly and professionally follow what is happening in Israel, taking into consideration all factors that may affect its economic outlook, thus making it virtually impossible
to conceal the complex and dangerous situation that Israel finds itself. These reports serve indeed as a mirror reflecting Israel’s reality without filters or self-justifications, a reality that is thus conveyed to the international economic community. As such, Moody’s report is very likely to affect the perceptions of global economic players, particularly those sitting on the fence regarding investment alternatives elsewhere, the more so given that they have been repeatedly surprised with bad news regarding recent developments in Israel.
It is imperative that Israel’s government relates to Moody’s report with utmost seriousness, taking it into account before making fateful policy decisions. Economic considerations per se should never be decisive vis a vis security considerations, but neither should they be absent from the discussion. After all, we want not only to “win” this war (whatever “total victory” may mean), but to emerge from it as a prosperous and vibrant society.
Thirty-six years ago, the global credit rating companies began to rank the Israeli economy (the first was S&P, followed by Moody’s, and then Fitch), and since then the ratings of Israel’s economy have steadily improved, and never declined. On February 8, 2024, Moody’s announced for the first time ever that it had downgraded Israel’s credit rating, and furthermore, it announced a “negative outlook,” meaning that there is a significant probability of a further downgrading in the near future. This constitutes a severe blow for Israel not only in the economic context: we live in a world where the security, political, economic, and social dimensions are intertwined, and determine jointly the fate of countries.
Moody’s report refers not only to the war and its immediate economic consequences, but also to wider contributing factors. Among them: the lack of a political horizon or a clear plan for “the day after” the war; the refusal of the Israeli government to seriously consider the US for a “grand deal,” including normalization with Saudi Arabia; the political instability that afflicts Israel, particularly if the war cabinet dissolves as expected; the prospect of renewed political polarization and social unrest; the weakening of the state institutions, particularly the executive and legislative branches. The report explicitly states these factors as having increased Israel’s economic and political uncertainty and the consequent risks, thus casting doubt on Israel’s ability to recover from the entanglement in which it finds itself.
At the same time, the report praises the resilience of the Israel’s economy; the independence of its judicial system which, together with civil society, prevented the judicial reform; and the sound policies of the Bank of Israel and the stability of the banking system. It is interesting to note that these praises go to the same institutions that politicians used to scorn until not long ago, and even during the war.
The downgrading by Moody’s means that the Israeli economy is seen as increasingly risky, and therefore that the risk premium on Israel’s debt will rise accordingly (the risk premium has already increased with the war, but the downgrade further validates it). The consequence is that a larger share of the state budget will be devoted to interest payments, at the expense of all other expenditures, from defense to education and health. Furthermore, Israeli firms will also face higher interest rates for their loans, certainly those firms that operate in international markets. Thus, the lowering of the rating has very tangible economic consequences, affecting the well-being of all Israelis.
The report also expresses serious concern about Israel’s northern front, citing estimates by the Ministry of Finance that the national product might shrink by 1.5% (that is, negative growth) in the event that a war with Hezbollah develops, and it warns of the fateful consequences of such a scenario.
The rating companies regularly and professionally follow what is happening in Israel, taking into consideration all factors that may affect its economic outlook, thus making it virtually impossible
to conceal the complex and dangerous situation that Israel finds itself. These reports serve indeed as a mirror reflecting Israel’s reality without filters or self-justifications, a reality that is thus conveyed to the international economic community. As such, Moody’s report is very likely to affect the perceptions of global economic players, particularly those sitting on the fence regarding investment alternatives elsewhere, the more so given that they have been repeatedly surprised with bad news regarding recent developments in Israel.
It is imperative that Israel’s government relates to Moody’s report with utmost seriousness, taking it into account before making fateful policy decisions. Economic considerations per se should never be decisive vis a vis security considerations, but neither should they be absent from the discussion. After all, we want not only to “win” this war (whatever “total victory” may mean), but to emerge from it as a prosperous and vibrant society.