Israel's economy is suffering due to the war on Gaza (Al Jazeera)
Economists are awaiting the decision of the credit rating agency Moody's, within two weeks, regarding Israel's credit rating, amid expectations that it will lower it from its current level of "A1", after a series of meetings between the agency's analysts and senior officials in the Israeli Ministry of Finance and the Bank of Israel last week, according to Globes newspaper. Israeli economic.
In normal times, rating agencies publish their decisions twice a year on pre-determined dates, and Moody's was scheduled to publish Israel's rating decision 3 months ago, at a time when the only thing worrying the Israeli Ministry of Finance was the possibility of lowering rating expectations, due to the government's judicial amendment program, according to Globes. .
The aggression against the Gaza Strip broke out following Operation Al-Aqsa Flood, just days before Moody’s was scheduled to announce its decision regarding Israel. Moody’s postponed it “until the picture becomes clear,” but placed it under “negative monitoring,” a process at the end of which a decision will be taken to either lower the rating to “A2” or maintain the existing classification.
The rating agencies Fitch and Standard & Poor's also announced that they are considering lowering Israel's credit rating.
4 factors
The sovereign rating, according to Moody's methodology, consists of 4 axes: The first is economic strength, in which Israel excels, according to the newspaper, citing a report published by the agency at the beginning of the war.
According to the newspaper, by this measure alone, Israel’s rating was supposed to jump at once to the “AA3” level, which is the same credit rating for Hong Kong, Britain, and Qatar.
However, Israel’s rating was subjected to downward pressure from the second axis in the classification equation, which is institutions and governance power, which is a rating two degrees lower than the economic power component. The third axis is financial strength, while the fourth and final axis is “the great unknown,” according to the newspaper’s expression, which is Vulnerability to risk events.
Infographic of Israel's economic losses due to the Gaza War (Al Jazeera)
Moody's concern
According to the newspaper, Moody's is "well aware" of Israel's proven ability to recover from economic shocks very quickly, and said at the beginning of the war that the greatest risk to Israel's rating is the significant escalation of the military conflict or its expansion beyond Israel's borders, and after 3 and a half months have passed since the war, The "nightmare" scenario, as Globes put it, of all-out war in the Middle East has not materialized.
The newspaper pointed out that there was another risk that the agency stressed at the beginning of the war, as a possible reason for lowering the rating, which was that it might reach the conclusion that a military confrontation would weaken Israel’s institutions, especially with regard to the effectiveness of policy making. In other words, Moody’s felt Concerned about financial indiscipline following war, as happened with Israel after the 1973 Yom Kippur War.
Israel is facing difficulty in a specific matter. Behind the cost of the war, amounting to 220 billion shekels ($58.26 billion), there is a state of uncertainty about a permanent increase ranging from 15 billion shekels ($4 billion) to 20 billion shekels ($5.3 billion) in spending. Annual defense in the coming years, according to the newspaper.
Prime Minister Benjamin Netanyahu spoke about linking defense spending to gross domestic product, and Moody's is concerned about the burden this will impose on Israel's financial flexibility, according to the newspaper.
The Israeli officials whom Moody's spoke to recently tried to show that the exceptional war spending had financial support, hoping that the measures approved by the government last week in the revised state budget for 2024 would satisfy the agency, according to the newspaper, which indicated that the measures save 16 billion shekels through increased... 1% in value-added tax rate from 2025, and mileage tax on electric cars from 2026.
If Moody's is convinced that what the government approved will be implemented, there is a "good chance" to remove the threat of Israel's classification, but there is a problem with the institutional factor and the strength of governance, according to the newspaper.
Among all the rating agencies, Moody's was the most critical of the government in its position on the judicial amendment, according to the newspaper.
Reducing effect
Globes quoted Yonatan Katz, chief economist at Leader Capital Markets, as saying, “We know that Israel’s rating has already declined, in practical terms... We see that in Israeli bond yields at the international level, and even in the local market. We see the difference in Israel at 30.” "Basic points above the interest rate on US bonds. We have not seen this in a very long time. The market expects a downgrade in the rating, so the rating announcement will not be tragic."
But Katz believes that the impact of the rating downgrade will only be short-term on market indicators, and rules out any major or long-term impact, according to what the newspaper quoted him as saying.
Regarding the potential impact of downgrading the rating, Katz says, “The credit rating is an official analysis that shows that the situation is not as good as it was before,” according to what the newspaper quoted him as saying.
Lowering the credit rating would raise interest rates and the cost of debt, so the newspaper quotes Katz as saying, “This step would increase Israel’s debt service expenses so that everyone would feel that in their pockets.”
The newspaper quoted a fixed income analyst at Bank Leumi, David Resnick, as saying, “In Israel we have pension funds, advanced training funds, and sometimes mutual funds as well... When the price of Israel’s debt rises, this means that the price of bonds decreases, because there is a relationship Inverse between return and price.
Source: Israeli press