International credit ratings agency Moody's has issued a harsh rating action report on Israel's economy, announcing in an exceptional move that it has downgraded the country's rating by two notches from A2 to Baa1, with a negative outlook. The new rating puts Israel on par with countries like Kazakhstan.
Moody's wrote, "The key driver for the downgrade is our view that geopolitical risk has intensified significantly further, to very high levels, with material negative consequences for Israel's creditworthiness in both the near and longer term.
Moody's added, "Longer term, we consider that Israel's economy will be more durably weakened by the military conflict than expected earlier. With heightened security risks (a social consideration), we no longer expect a swift and strong economic recovery as in previous conflicts. In turn, a delayed and slower economic recovery in combination with a more prolonged and broader military campaign will more persistently impact public finances, further pushing out the prospect of a stabilization of the public debt ratio, compared to our earlier projections. In our view, the significant escalation in geopolitical risk also points to diminished quality of Israel's institutions and governance which have not fully mitigated actions detrimental to the sovereign's credit metrics.
"A severe escalation of the conflict with Hezbollah could be consistent with a markedly lower rating, in particular if Israel's economic and fiscal strength were to weaken further. The risk of a broader escalation involving Iran remains, even though it continues to be low. Uncertainty over Israel's security and longer-term growth prospects are much higher than is typical at the Baa rating level, with longer-term risks to the highly mobile high-tech sector particularly relevant. Such negative developments would have potentially severe implications for the government's finances and may mark a further erosion in institutional quality.
Moody's forecast, "We expect real GDP growth of only 0.5% this year, and have materially lowered our expectation for growth next year to just 1.5%, from 4% previously.
"Consequently, we expect the government debt ratio to stabilize later and at a higher level than assumed previously. We now forecast the debt ratio to rise towards close to 70% of GDP, compared to our forecast of a decline towards 50% before October 7."
The rating cut is more severe than most forecasts in the markets had predicted. The downgrade itself is not surprising, but most forecasts predicted a downgrade by one notch, and not a fall of two notches at once. With this step, Moody's completes a three-notch reduction of Israel's rating within months, after last February it announced the first-ever downgrade in Israel's history.
The downgrade is mainly attributed to the escalation of the security situation in the north. Recently, Moody's representatives held talks with senior Israeli officials and figures in the economy. Alongside the military developments Moody's has been closely following how the cabinet has approved the breaking of the 2024 budget framework and delayed passing the 2025 budget, despite warnings from senior officials at the Ministry of Finance and Bank of Israel.
Accountant General Yali Rothenberg said, "The decision of credit rating agency Moody's is excessive and unjustified. The strength of the rating action taken does not match the fiscal and macroeconomic data of the Israeli economy. It is clear that the war on the various fronts is taking a toll on the Israeli economy, but there is no justification for the rating company's decision.
"At the same time, decisive and quick steps must be taken to approve a state budget for 2025. The budget must lead to the rebuilding of fiscal reserves, by maintaining a maximum deficit of up to 4% of GDP and returning to a path of decreasing the debt-to-GDP ratio. The state budget must encourage growth engines, investment in infrastructure, consideration of social needs and response to Israel's defense requirements."
A rare situation has been created in which the world's three major credit rating agencies each have different ratings for Israel. Moody's has the lowest rating with Baa1, the equivalent of BBB with the other agencies. Fitch rates Israel one notch higher at A and S&P rates Israel at A+.
Published by Globes, Israel business news - en.globes.co.il - on September 28, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.