Moody’s has downgraded Israel’s credit rating from “positive” to “stable”, citing recent events around the country’s proposed changes to the judicial system. Israel’s government attempted to implement large-scale reform without seeking broad consensus leading to weakening of institutional strength and policy forecasting. Despite this, Moody’s notes that the strength of Israel’s institutions and government remain very high despite some weakening in the context of current events. Moody’s expects the country’s strong economic growth and improving fiscal strength to continue. Growth is expected to slow due to the milder global environment and significant monetary tightening, with Moody’s predicting that real GDP growth will slow to around 2.6% this year before accelerating to around 3.5% in 2024.
The international credit rating agency Moody’s announced today (Friday) the lowering of Israel’s credit rating from “positive” to “stable”. This, against the background of concern in recent days about the drop in the rating due to the effects of the proposed changes in the legal system.
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“The change in the forecast from a positive position reflects a deterioration in the government in Israel, as illustrated by the recent events surrounding the government’s proposal to change the country’s judicial system. While mass protests led the government to halt the legislation and seek dialogue with the opposition, the way the government tried to implement a large-scale reform without seeking broad consensus indicates on the weakening of institutional strength and policy forecasting,” the agency’s statement reads.
However, they said that the strength of Israel’s institutions and government remained very high despite some weakening in the context of current events, which led Moody’s to lower its assessment of the quality of the executive and legislative institutions. At the same time, civil society and other institutions such as the security system have proven themselves to be effective against the power of the government, while it remains to be seen “how the strength and independence of the judicial system will develop in the future”.
It was also noted that “the risks in Israel’s ranking are now balanced, which leads to a stable forecast. While the discussions regarding the exact form of the legal reform continue, the government reiterated its intention to change the way judges are selected. This means that the risk of further political and social tensions within the country remains. On the other hand, If a resolution is reached without deepening these tensions, the positive economic and fiscal trends that Moody’s has identified in the past will remain. Overall, recent events have offset the positive developments that led Moody’s to assign a positive outlook in April 2022, related to strong economic and fiscal performance and the implementation of structural reforms by the previous government”.
“The confirmation of the A1 ratings reflects Israel’s strong economic growth and improving fiscal strength, which Moody’s expects to continue in its baseline scenario. The economy has proven resilient to many economic and geopolitical shocks in recent decades and has grown at a rapid pace, aided by Israel’s globally competitive high-tech industries. Baseline Forecasts Moody’s assumes continued solid growth in the medium term. The government’s fiscal indicators also improved rapidly after the temporary shock caused by the corona, with the public debt-to-GDP ratio falling by 10 percentage points of GDP within two years to 60.7% of GDP in 2022 Moody’s expects a further decline towards 55% by the end of next year,” it said.
Benjamin Netanyahu (Photo: Tomer Neuberg Flash 90)
The agency also noted that Israel’s economy has grown at a rapid pace in recent years, at an average of 4.1% during the decade until 2022, with the help of the high-tech industries. However, growth is expected to slow, given the milder global environment and significant monetary tightening. In its base scenario, Moody’s predicts that real GDP growth will slow to around 2.6% this year, before accelerating again to around 3.5% in 2024. Renewal of investments from abroad in Israeli hi-tech companies,” it said.
According to them, Israel benefits from several structural factors that underlie its good growth potential, i.e. rapid population growth, very strong export capabilities of the high-tech sectors, strong demand for its defense exports, as well as growing export potential from natural gas resources. Last year, the government recorded a budget surplus of about 0.6% of GDP. “The new government presented a prudent budget for the years 2023-2024, which aims for a budget deficit of just under 1% of GDP for two years. The deficit assumptions are also slightly higher, due to a decrease in GDP and income growth, will still cause a further decrease in the public debt ratio this year and next year towards 55% of GDP”, it was noted.
At the beginning of March, the rating agency issued an unusual warning about the apparent damage to the credit rating following the legal reform. So it was determined that if the policy continues and the legal reform continues to be promoted, there may be dramatic effects on the credit rating in the long term. However, they added, the consequences are yet to be seen in the short term. “The proposed reforms could weaken the institutions and negatively affect its sovereign credit profile,” the company claimed. “We generally expect a highly rated government to implement major institutional reform based on broad consensus and through extensive dialogue and clear communication,” they added.