Moody’s Slashes Israel’s Credit Rating Due to Gaza Conflict
In a significant move reflecting the economic implications of geopolitical tensions, Moody’s, a prestigious U.S. ratings agency, announced a downgrade of Israel’s sovereign credit rating. The decision, unveiled on Friday, stems from the ongoing, intense conflict with Hamas, the Palestinian resistance group, in Gaza. This marks a pivotal moment as Moody’s cites significant concerns regarding the political and fiscal stability of the nation amidst these tumultuous times.
The downgrade adjusts Israel’s rating to “A2,” positioning it five notches above the investment grade. Moody’s also maintained a negative outlook for the country, signaling the potential for further downgrades. This decision marks a historical first for Israel, indicating a notable shift in its economic forecast.
Motivated by the rising political risk and the anticipated weakening of Israel’s governance structures, this adjustment reflects Moody’s analysis projecting a considerably higher debt burden for Israel than previously expected. Furthermore, the agency anticipates a significant escalation in defense spending, almost doubling the 2022 figures by year-end.
Further exacerbating concerns, Moody’s also revised its outlook on Israel’s debt to negative, amid fears of escalated tensions with Hezbollah, a formidable force along Israel’s northern border. This decision arrives in the backdrop of devastating airstrikes and ground offenses in Gaza, resulting in nearly 28,000 casualties, predominantly among women and children, as per local health officials. The offensive was a retaliatory measure following a Hamas attack on October 7, which claimed approximately 1,160 lives in Israel.
In the wake of this downgrade, Bank of Israel Governor Amir Yaron reassured on the resilience and strength of Israel’s economy, emphasizing its capability to recover. Yaron highlighted the necessity for the government and the Knesset to proactively address the economic issues spotlighted by Moody’s report.
Conversely, Israeli Finance Minister Bezalel Smotrich dismissed the downgrade, critiquing it as a pessimistic overview devoid of solid economic rationale. He reiterated the strength of the Israeli economy and its capacity to sustain war efforts, expressing confidence in eventual victory.
The downgrade follows similar cautious measures by other ratings agencies, including S&P Global Ratings, which adjusted Israel’s credit outlook to negative, and Fitch placing Israel on negative watch due to the conflict’s ramifications.
This downgrade underscores heightened social risks and reveals a deteriorating public finance landscape in Israel. Consequently, if the downgrade persists or triggers further downgrades, Israel may face increased borrowing costs, potentially necessitating stringent budget cuts and tax increases to prevent the budget deficit from spiraling.
Despite these challenges, Moody’s acknowledges Israel’s historical resilience to economic crises, emphasizing the government’s unwavering commitment to debt repayments. Lawmakers have already responded by initially approving a revised 2024 state budget to support conflict financing and mitigation efforts.
Prime Minister Benjamin Netanyahu, addressing Moody’s move, expressed optimism that the nation’s rating would recover post-conflict victory. However, Moody’s insists that without a durable end to hostilities or a long-term security restoration plan for Israel, the outlook remains uncertain.
Amidst ongoing negotiations for a ceasefire and humanitarian aid to Gaza, the future remains fraught with uncertainty. Moreover, Israeli forces prepare for a potential ground assault on Rafah, signaling a potential escalation in conflict. International voices, including U.S. President Joe Biden and the United Nations, have critiqued Israel’s response and highlighted the need for civilian protection in Gaza.
The downgrade by Moody’s illustrates the profound impact of geopolitical instability on national economies, underscoring the intricate interplay between security concerns and financial health.
