Government tense ahead of Moody's decision on Israel's credit rating

Finance Ministry officials say Israel's economy stable and appeal to credit rating agency's representatives pointing to budget reallocations to combat large deficit for 2024
Officials in the Israeli market are tense on Thursday of credit rating agency Moody's decision on Israel’s credit rating to be announced late Friday in a move that might mark the country’s first-ever credit rating downgrade.
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In recent days, senior officials in the Prime Minister's Office and Finance Ministry have tried to convince Moody's economists in personal conversations not to downgrade the rating. They argued that despite the war in Gaza, Israel's economy is stable, and adjustments have been made to the state budget to prevent an unplanned deficit.
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מטה מודי'ס בניו יורק
מטה מודי'ס בניו יורק
(Photo: Reuters)
According to the officials, including Finance Minister Bezalel Smotrich and four others from the ministry, the large deficit in the budget expected this year sitting at 6.6%, is temporary, and Israel’s debt-to-GDP ratio, which is expected to increase in 2024 from 59% to 68%, will decrease again in the coming years.
This is also because the government has already formulated steps to stabilize the deficit in next year's budget, including raising VAT to 18% in January 2025, increasing the health tax by 0.15%, and considering additional tax hikes such as the mileage tax for electric cars and imposing a congestion charge when entering Tel Aviv (a plan that was postponed for now).
Currently, Moody's credit rating for Israel stands at A1, with the average ratings of the three major rating agencies of Israel standing at 20th place globally.
Moody's essentially has three options at this time: either maintain Israel’s current rating and warn the country about the future, after Moody's already issued a "negative outlook" warning to Israel's credit rating in its previous decision.
Another option is a partial negative downgrade, a situation considered favorable for Israel given the ongoing war. The third, and worst option, is downgrading Israel’s rating to A2.
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ישיבת ממשלה
ישיבת ממשלה
Bezalel Smotrich, Benjamin Netanyahu
(Photo: Haim Tzach, GPO)
A credit rating downgrade is expected to lead to an increase in interest rates charged globally on loans taken by the State of Israel and Israeli companies. Such an increase in interest rates will immediately trickle down to mortgage rates as well.
Other negative effects expected in the coming days, if the rating is lowered, include likely temporary currency devaluations in the Tel Aviv Stock Exchange and the weakening of the shekel against foreign currencies.
A senior official at the Finance Ministry told Ynet that there was a serious concern that Israel's rating will be downgraded this time, "even though there’s no real justification for it because the Israeli economy is stable."
Moody's knows that the Israeli economy is stable despite the war, but the only reason Moody's may downgrade the rating now is due to an increase in the risk to the economy and concerns about the Gaza war dragging on, with the possibility of it spreading to a regional war, especially on the northern border and with other Arab countries, such as the Houthi rebels in Yemen.
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