Ratings firm Moody’s downgraded Israel’s debt on Feb. 9, pointing to the ongoing war conditions and warning that the country’s budget deficit will be “significantly larger than expected” in the coming years.
The main driver for Moody’s assessment is that the ongoing conflict with Hamas, its aftermath, and wider consequences will “materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength for the foreseeable future.”
“While fighting in Gaza may diminish in intensity or pause, there is currently no agreement to end the hostilities durably and no agreement on a longer-term plan that would fully restore and eventually strengthen security for Israel.”
Even if an agreement were formed, its durability would remain “highly uncertain.” And if there is a resolution to the conflict, Israel could face a period of “elevated domestic political upheaval and renewed polarization when the war cabinet dissolves.”
Moody’s pointed out that Israel’s public finances are deteriorating amid the war.
“Over the coming years, Israel’s budget deficit will be significantly larger than expected before the conflict.”
The Bank of Israel is expecting the cost of the current conflict between 2023 and 2025 to be about 13 percent of the 2024 GDP. Defense spending is expected to be higher while tax revenues dip.
The public debt ratio, which was on a downward trend, “has now reversed.” The rating agency expects Israel’s debt burden to be “materially higher” than what was projected before the conflict.
Moody’s had expected Israel’s government debt ratio to fall to 55 percent of the GDP. In 2022, the ratio was 60 percent. But with the ongoing conflict, the rating agency predicts it to rise to 67 percent by 2025.
Meanwhile, the risk of escalation in the conflict remains “significant,” especially an escalation between Israel and Hezbollah.
“Conflict with Hezbollah would pose a much bigger risk to Israel’s territory, including material damage to infrastructure, renewed calls on reservists, and further delays to the return of the evacuees to the region,” Moody’s said.
“The Ministry of Finance estimates that real GDP could contract by up to 1.5 percent overall this year if this downside scenario materialized compared with positive growth of 1.6 percent under a status quo scenario.”
A Resilient Economy
Although the Moody’s report presents a potentially bleak economic picture for Israel, businesses have expressed confidence the country will weather the crisis and emerge stronger.“Such an investment, at a time when Israel is facing a war against absolute evil, a war in which good is obliged to defeat evil … is an expression of confidence in the State of Israel and the Israeli economy.”
Last month, hedge fund billionaire Bill Ackman and his wife, Neri Oxman, bought a 4.9 percent equity stake in the Tel Aviv Stock Exchange, a vote of confidence in the economy.
Even though fourth-quarter funding was lower, it didn’t fall significantly amid the war. Funding for the quarter is estimated to be $2.1 billion compared to the estimated average funding per quarter of $2.5 billion in 2023.
“Many soldiers are returning home from battle with not only new ideas around improving current capabilities of software, defense, and cyber security but also around the efficiency of businesses and how they can perform better at times of uncertainty or economic turmoil,” Mor Assia, founding partner and co-CEO of iAngels, said.
“I am confident we will see a fresh vintage of innovation at attractive valuations for investors, a trend we already saw beginning in 2023 following the global public markets cycle.”
“The security challenges require us to have a budgetary diminution and tightening, but we are determined to invest in the engines of growth,” Mr. Smotritch, the finance minister, said.“The Israeli high-tech industry is the engine of our economy and leads the Israeli economy, and we are giving it exactly the boost it needs at this time.”
