Global integrated risk assessment firm Moody’s on Friday affirmed its sovereign credit rating for Israel at “A1” but downgraded the outlook on the Israeli economy to “stable” from its previous status, “positive.”
The decision, which many financial experts had warned of, came following prolonged controversy regarding the government’s judicial overhaul plans.
Moody’s wrote that “the change of outlook to stable from positive reflects a deterioration of Israel’s governance, as illustrated by the recent events around the government’s proposal for overhauling the country’s judiciary... The manner in which the government has attempted to implement a wide-ranging reform without seeking broad consensus points to a weakening of institutional strength and policy predictability. As a result, the risks on Israel’s rating are now balanced, leading to a stable outlook.
“All in all, the recent events offset the positive developments that had led Moody’s to assign a positive outlook in April 2022, which related to strong economic and fiscal performance and the implementation of structural reforms by the previous government,” the statement continued.
The agency had upgraded Israel’s outlook to “positive” in April 2022, explaining then that the key drivers for the change in outlook included the government’s reform agenda that aimed to address longer-term challenges, and the agency’s expectation of a further reduction in the government’s debt ratio.
Netanyahu and Herzog spoke with Moody's
Before the publication of the rating on Friday, Prime Minister Benjamin Netanyahu and President Isaac Herzog each spoke to officials at Moody’s in the hope of persuading them not to issue the downgrade.
Israel’s current “A1” rating is an upper-medium score and indicates that the country is capable of repaying short-term loans.
Moody’s had previously warned the government of economic impacts on its proposed legislative policies and many economists echoed those concerns.
In March, Moody’s said the reform, if implemented in full, “could materially weaken the strength of the judiciary and be credit negative. The planned changes could also pose longer-term risks for Israel’s economic prospects, particularly capital inflows into the important high-tech sector.”
On Saturday night, Netanyahu and Finance Minister Bezalel Smotrich issued a statement in response to the downgrade.
“The Israeli economy is stable and firm and with the help of God it will remain so,” the statement read.
“The Moody’s ranking analysts correctly recognize the strength of the Israeli economy in all the indices and the correct and responsible economic leadership that we lead in wise management of public expenditure and promoting growth reforms… The fear of Moody’s analysts from public controversy and its influence on Israel’s political and economic stability is natural for those who do not know the resilience of Israeli society,” it continued.
“As someone who believes in the power of Israeli society, its unity and ability to succeed in disputes and crises, as we have done many times in the past, we are convinced that this will be the help of God this time too,” it concluded. “There will be no harm to Israeli democracy and the Israeli economy. And we will continue to lead an economic, security and social policy and do everything for a stable, growing and prosperous Israeli economy.”
Criticisms have begun to flow
The hi-tech workers’ protest headquarters issued a statement following Moody’s decision, saying that “Moody’s announcement and the criticism in it make it clear again, contrary to Netanyahu’s lies, that the coup d’état and the conduct of the government are harming the Israeli economy and hi-tech.”
The statement made mention of the warnings issued by hundreds of global economists, organizations and executives who have raised a red flag and claimed that the judicial reform is likely to severely weaken Israel’s hi-tech sector – one of its primary economic engines – by lowering its credit rating and thereby scaring away foreign investors.
“They who smugly ignored all the warnings of the economists and heads of industries; who, in an economically, security and politically unstable period, radicalized their positions and ran amok; who prefer to incite with cowardice instead of taking responsibility and running the country – they will be guilty of destroying the value of hi-tech and the economy and harming security, health, education and every Israeli citizen,” the statement read, noting that the ongoing hi-tech protests would continue “until the legislation that endangers Israel is repealed.”
MK Avigdor Liberman, a former finance minister and noted critic of the current administration, lambasted the government’s mishandling of the country’s finances in the short period that it has been in power.
“It’s not just that Moody’s is downgrading the credit rating. Everyone’s going to look at the electricity bills they pay, the prices in the supermarket, the mortgages [and realize] – all this happened in three months,” Liberman said on Saturday.
“We left the economy on December 31 with a surplus of NIS 10 billion in the account. Credit rating companies had raised Israel’s credit forecasts and ranking. At the end of 2022, we were acclaimed by the World Bank, the International Monetary Fund and OECD, and now see where we are three months after,” he fumed. “Someone here has managed to crush the economy, society and security.”
Herb Keinon contributed to this story.