Following its downgrade of Israel’s credit rating last Friday, international rating agency Moody’s held a webinar for investors yesterday to explain the decision. Kathrin Muehlbronner, senior vice president of Moody’s Sovereign Risk Group, led the discussion and presented the considerations that led to the lowering of Israel’s credit rating by two rungs to Baa1, with a negative outlook.
Muehlbronner stressed that, despite Israel’s military successes, the lack of a clear exit strategy from the current conflict represented one of the main factors in the decision. She said that the current situation did not provide the required certainty for investment and stable economic growth. She added that, unlike in the case of previous conflicts, this time, economic recovery would be slow and more complicated.
Internal political risks also featured prominently in Moody’s analysis. Muehlbronner said that the current government’s actions were exacerbating social tensions, and were liable to harm international support for Israel. She commented specifically on the tension caused by the actions of Jewish settlers in the territories, attempts to undermine the independence of the justice system, and the delays in passing a recruitment law for haredim.
On the economic front, Moody’s presented worrying forecasts. The agency cut its growth forecast for 2025 substantially, to just 1.5%, a steep drop from its previous forecast of 4%. The forecast for long-term growth was also cut, from 4% to 3% annually.
Muehlbronner expressed particular concern about Israel’s fiscal position. She estimated that the deficit in 2025 would be 2% of GDP higher than the government’s declared target, and would reach 6% of GDP, because of low economic growth and skepticism about the full implementation of the government’s proposed measures to achieve fiscal restraint. As a result, government debt is expected to reach 70% of GDP in the coming years, considerably more than in previous estimates.
Despite the worrying picture, Muehlbronner also mentioned Israel’s strengths, including high foreign currency reserves, a stable banking system, and varied sources for raising debt. Nevertheless, she expressed doubt about a swift return to the security and economic situation that characterized Israel in the past, and stressed that, this time round, the challenges look larger and more complicated.
Published by Globes, Israel business news - en.globes.co.il - on October 1, 2024.
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