Moody's credit rating Predicts Challenging Economic Times for Israel Following Recent Conflict

Credit rating agency Moody's recently placed Israel under negative surveillance due to the ongoing conflict. In a document not yet widely circulated, Moody's has unveiled a particularly bleak forecast for the Israeli economy, anticipating significant economic challenges in the aftermath of the war.

Growth in 2023: According to Moody's, the growth rate for 2023 is expected to reach 2.8%, a prediction closely aligned with the Bank of Israel's forecast and other entities. However, Moody's emphasizes that the most substantial economic impact from the conflict is projected for 2024 when the Israeli economy is anticipated to contract by 1.4%. This negative growth is magnified when considering population growth, with GDP per capita expected to decrease by nearly 3%.

Inflation Surge: Moody's also foresees a notable spike in inflation rates, reaching figures not witnessed in Israel for many years. It is predicted that the average inflation throughout 2023 will reach 4.5%. In 2024, the inflation rate is expected to surge further to an average of 6.8% throughout the year, considerably higher than the Bank of Israel's estimate of 2.5% for the last quarter of 2024.

Budgetary Strain: The financial burden of the conflict, combined with decreasing tax revenues, is expected to strain the state budget. Moody's predicts that in 2023, the deficit in relation to GDP will rise to 3.5%, escalating further to a record level of 7.1% in 2024. The debt-to-GDP ratio is also forecasted to increase at a faster rate than projected by the Bank of Israel, reaching 66.7%.

Downgrade Possibility: Moody's highlights the possibility of a downgrade should the company determine that the security situation jeopardizes fiscal stability in Israel, or if the conflict spills over into other regions.

Institutional Quality: Moody's has already noted a drop in the score related to the quality of institutions in Israel due to an attempted coup earlier in the year. While it appears that attempts to promote a coup have subsided after the military operation, Moody's will continue to monitor developments in this area.

Recovery Uncertainty: Rating agencies are skeptical about Israel's ability to swiftly recover after the conflict. Economists from S&P, another credit rating agency, presented a more pessimistic outlook than the Bank of Israel. They explained that the disparity in forecasts is primarily attributed to varying estimates of the economy's recovery rate in 2024 when the fighting is expected to conclude.

The challenging economic outlook paints a sobering picture for Israel as it grapples with the consequences of the recent conflict and strives to rebuild its economic stability in the years to come.