Israeli investors were reluctant about Moody's downgrade of Israel's credit rating, and the Israeli stock market responded with a relatively modest decline on Sunday morning, with the TA-35 index down about 0.4% and the TA-125 index down about 0.5%. It fell. .
Local financial industry insiders expect the stock market to continue on a positive trend.
Israel, which has reviewed the rating agency's report on the downgrading of Israel's credit rating from Aaa to A2, cannot remain indifferent to the arguments presented, some of which contradict each other.
The essence of this report is that it expresses an absolute lack of trust in Israel's political actors, along with complete confidence in Israel's financial and monetary system, and that it is difficult to support the Israeli economy in the face of a downgrade decision. It only strengthens it.
What is the reason for the downgrade?
The report concluded that the rating agency had already begun its review on October 19th, and that the main reason for the downgrade was that Israel would be more likely to move forward once the war that Israel is waging against Hamas in the Gaza Strip ends. Moody's estimates that this will have a wide-ranging impact.
This conclusion is possible without extensive financial knowledge, as Moody's continues to rate Israel's business environment as deteriorating, affected by the war.
However, authorities did not say how the situation had worsened or how the war had affected Israel's business sector, in which regions and to what extent.
Moody's stressed the word “likely” and pointed out that the fiscal deficit could widen, and that the main impact would be political risks that could weaken the legislative and judicial institutions in the future. . In other words, Moody's concerns are not rooted in current economic conditions or future conditions that can be examined or expressed through numerical parameters or other formulas, but rather in what could happen. .
Again, this is worth emphasizing. Political conditions, as defined by government agencies, may pose risks to investing in Israel due to political conditions that could undermine Israel's democratic institutions.
Moody's also notes that the security environment in which Israel exists increases economic risks, and the absence of an agreement to strengthen Israel's security increases economic risks. However, the environment surrounding Israel was and remains the same; for example, there were no political agreements with terrorist organizations.
The only thing that has changed in the Middle East environment is that it has been reoccupied with the implementation of a widespread terrorist plot aimed at harming Israel and its civilian population and leading to destruction “from the river to the sea.” The rating agency also noted that while it estimates that Israel's debt burden will increase, it does not indicate unaccounted factors that would cause the debt burden to increase and the amount of the increase.
What is certain is that now that Israel is being downgraded, the debt burden will certainly be higher.
Moody's also recognizes the strength and economic resilience of the Central Bank of Israel and its ability to quickly stabilize financial markets. He also acknowledged the liquidity strengths of the Bank of Israel, the banking sector, and the government.
But the report said they were weakened by conflict and were already weakened by public controversy over judicial reform.
But once again, the agency went beyond the generalization that the war would weaken Israel to the expected numerical weakening in its report and how it would affect Israel's economic strength. need to be presented.
On the contrary, Moody's also maintains Israel's highest local currency rating and foreign currency rating at Aaa, with the latter accounting for approximately 39% of Israel's gross domestic product. The agency also notes that even after the projected budget deficit, Israel's debt-to-GDP ratio will remain at about 67% until 2025, increasing by about 7% compared to 60% in 2022.
How will Israel be affected?
In other words, Israel remains highly capable of meeting its obligations and has a much better debt-to-GDP ratio than developed and wealthy countries.
Additionally, the agency said the 2024 budget includes several tax policies to offset some of the deficit, such as a 1% increase in value-added tax, which is expected to increase approximately 0.35% of GDP each year. It is pointed out that support measures are included. . It should be noted that Moody's reports do not have a direct impact on Israeli banks' capital ratios, as no local banks use Moody's and rely primarily on S&P ratings.
For example, Mika Goldberg, head of equity research at Psagot Securities, said, “We would only expect an impact on regional banks if Moody's downgrade leads to an S&P downgrade.
In our estimation, it is reasonable to think that S&P will also downgrade Israel's credit rating soon. ” But regardless of whether rating agencies tend toward a left-leaning or right-leaning political direction, it's important to note that analysts don't like uncertainty. It only increases during wars, especially in the absence of a stable horizon that allows for the desired guarantees for economic factors, such as the political order that the Americans are promoting.
The Moody's report appears to be more of a pressure tactic by the US to get Israel to accept its position on the Palestinian issue than an examination of the Israeli economy, but it primarily expresses distrust of current political actors. and even cites existing political divisions. Israel is one of the clouds casting a shadow over the economy.
In this sense, Moody's may have resonated with the Israeli public, who are currently calling for a complete replacement of all party leadership in all aspects of Israeli politics with a unified leadership.