International credit rating agency Moody’s says the ceasefire agreement that entered into force between Israel and Hamas reduces the immediate risks to the Israeli economy, but the agency stresses that more significant progress will have to be achieved to ensure long-term stability. The update comes four months after the agency downgraded Israel’s sovereign rating by two notches to Baa1, with a negative outlook.
In the review released today, Moody’s says: “If the ceasefire agreement is adhered to and further progress is made, it reduces the near-term downside risks of the protracted conflict to the Israeli economy and public finances.” Moody’s adds that it “also downplays the risks facing the Middle East from escalation involving Iran, and the impact of the conflict on global supply chains from shipping disruptions in the Red Sea.”
However, the agency warns that “the terms of the ceasefire agreement are currently limited in scope and duration. Only the first phase has been agreed, and further negotiations will be needed to ensure a durable cessation of hostilities and a permanent reduction of regional geopolitical tensions.”
Despite the necessary caution, Moody’s update represents the first indication that Israel’s credit rating could improve in the future, provided that significant progress is made in the process of stabilizing the security situation. This contrasts with the agency’s previous assessments, which saw no rating improvement in sight.
Moody’s presents figures indicating the major blow to the Israeli economy as a result of the war. According to the figures, GDP contracted in real terms by an average of 2.4% on an annual basis from the fourth quarter of 2023 to the third quarter of 2024, compared to an average annual GDP growth of 4.7% in the period before the war.
The agency also comments on the financial challenges facing Israel. The report stated: “Despite measures implemented by the government to mitigate the deterioration of the fiscal balance, Israel’s central government fiscal deficit has also widened by approximately 5-6 percentage points of GDP since the start of the conflict compared to levels from 2022 until the third quarter of 2023.” “. He added: “A permanent and material de-escalation of tensions would reduce the risk of further weakening of financial and economic metrics, although reversing the deterioration we have seen so far is unlikely in the near future.”
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Moody’s also stresses that a ceasefire agreement could have positive consequences far beyond Israel’s borders: “For the broader Middle East region, a permanent ceasefire would reduce the risks from escalation that has led to a large-scale conflict between Israel and And Iran.”
Challenges on the way to a permanent agreement
Despite all the positive tone, Moody’s warns of the difficulties that lie in the path towards a permanent agreement. “Given the challenges facing the extension of the shorter ceasefire in November 2023, similar difficulties are likely to be faced by implementing a longer ceasefire and negotiating the second and third phases, which relate to the status of the remaining Israeli hostages and Israeli forces in Gaza, as well as the status of the remaining Israeli hostages and Israeli forces in Gaza.” “. Reconstruction and future management of the sector.” The report notes that “internal political challenges and security concerns constitute some of the obstacles facing Israel that may hinder further progress.”
In announcing the downgrade of its credit rating in September last year, Moody’s said that it did not expect the Israeli economy to recover as quickly and strongly as it recovered from past conflicts. The current update gives some indication that an improvement is possible, even if gradual and moderate, and states that “effective implementation of the ceasefire agreement and additional progress towards a permanent cessation of hostilities in Gaza would reduce downside risks to sovereign credit.” power.”
Published by Globes, Israel Business News – en.globes.co.il – on January 21, 2025.
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