After downgrading Israel’s credit rating last Friday, international rating agency Moody’s held a webinar for investors yesterday to explain the decision. Kathryn Muelbrunner, Moody’s Senior Vice President of Sovereign Risk Group, led the discussion and presented the considerations that led to a two-notch downgrade of Israel’s credit rating to Baa1, with a negative outlook.
Muelbrunner stressed that despite Israel’s military successes, the lack of a clear exit strategy from the current conflict represents one of the main factors in the decision. She said that the current situation does not provide the certainty required for investment and stable economic growth. She added that, unlike what happened in previous conflicts, the economic recovery this time will be slow and more complicated.
Domestic political risks also featured prominently in Moody’s analysis. Muelbrunner said that the current government’s actions exacerbate social tensions and could harm international support for Israel. It commented in particular on the tension resulting from the actions of Jewish settlers in the territories, attempts to undermine the independence of the judicial system, and the delay in passing the Haredi conscription law.
On the economic front, Moody’s presented worrying forecasts. The agency lowered its growth forecast for 2025 significantly, to just 1.5%, a sharp decline from its previous forecast of 4%. Long-term growth expectations were also lowered from 4% to 3% annually.
Muelbrunner expressed particular concern about Israel’s financial situation. It estimated that the deficit in 2025 would be 2% of GDP higher than the government’s stated target, and would reach 6% of GDP, due to lower economic growth and doubts about the full implementation of the measures proposed by the government to achieve fiscal restraint. As a result, government debt is expected to reach 70% of GDP in the coming years, which is much higher than previous estimates.
Despite the troubling picture, Muehlbroner also cited Israel’s strengths, including high foreign currency reserves, a stable banking system, and diverse sources of increased debt. However, she expressed doubt about the possibility of a rapid return to the security and economic situation that characterized Israel in the past, and stressed that the challenges this time appear greater and more complex.
Published by Globes, Israel Business News – en.globes.co.il – on October 1, 2024.
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