In a move that has sent shockwaves through financial markets, Moody’s Investors Service downgraded Israel’s credit rating for the first time in history. Dr. Gil Bafman, Chief Economist of Bank Leumi, shed light on the downgrade, emphasizing that it wasn’t entirely unexpected given Moody’s earlier indications.

According to Bafman, Moody’s implemented a forecast first outlined on November 20, 2023, highlighting vulnerabilities stemming from political instability, security concerns, and fiscal implications. Israel’s rating was downgraded to A2, equivalent to A in other agencies, now aligning it with countries like Poland and Chile.

Moreover, Moody’s shifted its forecast to negative, indicating potential further reductions if conditions worsen. Key concerns outlined by Moody’s include the ongoing security risks, particularly regarding Hezbollah in northern Israel, and the enduring economic repercussions stemming from war with Hamas.

Despite these challenges, Bafman noted Israel’s strengths, including its resilient economy, stable financial institutions, and effective central bank policies. However, he cautioned that the risk of escalation remains significant, with potential economic impacts extending to multiple sectors and lasting for an extended period.

Other economists echoed these sentiments, with Rafi Gozlan from IBI Investments highlighting the anticipation of the downgrade in market pricing. Similarly, Ronan Menachem of Mizrachi Tefahot emphasized the importance of addressing the forecast downgrade, suggesting that without significant positive developments, stabilizing the rating might prove elusive.

However, amidst the concerns, there are glimmers of hope. Menachem pointed out that Israel’s debt-to-GDP ratio, while increasing, remains favourable compared to other economies. Additionally, the potential for market recovery post-conflict offers optimism, provided necessary economic reforms are implemented.

Yet, the downgrade has prompted calls for decisive action from business and political leaders. The Business Forum urged for a responsible budget focused on growth, innovation, and productivity enhancement. Economists for Democracy emphasized the need for leadership accountability and prudent economic decision-making to steer Israel’s future in a positive direction.

Meanwhile, tech leaders underscored the importance of responsible governance, with some calling for early elections to instil confidence in leadership capable of navigating economic challenges effectively.

While the immediate impact of Moody’s downgrade is felt across financial markets, the resilience of Israel’s economy offers hope for recovery. However, the path forward requires concerted efforts from both policymakers and business leaders to address underlying vulnerabilities and restore investor confidence.

Image credit: Signage is seen outside the Moody’s Corporation headquarters in Manhattan, New York, US.
(photo credit: Reuters/Andrew Kelly)