"Moody's: Israel credit rating will be further impacted by the current military conflict

Credit rating agency Moody's was about to  downgrade the country's credit rating from AA to A, but the decision didn’t come through after the promotion of "wide-ranging and controversial" legal legislation was frozen. The report expresses cautious optimism that the legislation, which was halted following the recent conflict in Gaza, will not be resumed after the war. A month ago, Moody's had placed Israel's credit rating on "negative watch" in the aftermath of the military conflict.

Moody's emphasizes that the credit rating will be further impacted if the current military conflict escalates significantly or spreads beyond Israel's borders. However, the agency suggests that maintaining the current rating of A1 is possible if the conflict is resolved without causing lasting and substantial damage to Israel's economic strength.

The report conveys a message to the government, stating that the decision to downgrade Israel will be influenced not only by the war's development but also by the government's economic management during the conflict. Moody's will examine the government's ability to implement policies that reduce economic and fiscal implications while encouraging a swift recovery.

Moody's estimates a 3% deficit in Israel by the end of the year, deepening to 7% next year due to war and reconstruction expenses alongside a decrease in state revenues. The agency acknowledges Israel's historical ability to recover quickly from increased debt and deficits.

The report highlights other challenges affecting Israel's credit rating, including income inequality, especially in the high-tech sector, and disparities in education and salary levels among different population groups. Moody's notes that social risks may increase as the share of Haredim and Arabs in the working-age population is expected to rise to 50% by 2060.

On a positive note, Moody's acknowledges the decision to extend the tenure of Bank of Israel Governor Prof. Amir Yaron, praising the effectiveness of the monetary policy. The agency also recognizes Israel's economic resilience to shocks, supported by the high-tech sector, consistent surplus in the balance of payments, and high foreign exchange balances.

While acknowledging Israel's high level of income, substantial household savings, and low debt, Moody's emphasizes the need for effective policies to navigate economic challenges and urges attention to social and economic disparities for long-term stability.