International credit rating agency Moody's is expected to release a harsh report in October, warning of a negative turn for Israel's economy that could lead to a serious decline in the future. However, the company isn’t expected to downgrade Israel's credit rating. Nonetheless, there is a possibility that the projected outlook would be downgraded further.
Moody's was the only rating agency that already downgraded Israel's credit rating outlook from positive to stable last April and warned of the implications of the judicial overhaul on the economy, at that time. Officials who met with representatives of the credit company recently believe Moody's may lower this outlook to negative in a report due late in October, or at least issue a warning that such a step would be taken in 2024.
Moody's economists held a series of meetings with leaders in the market over the past week and showed special interest in several key issues: the deteriorating high-tech sector, capital outflows from banks, insufficient integration of the ultra-Orthodox and Israeli-Arab sectors into the labor force, and the significant weakening of the shekel.
Economists are particularly concerned about the potential impact of the judicial overhaul on Israel’s economy, and fear it could cause a deep rift within society and have a direct impact on the country’s economic robustness, not only in the long term – but in the short term as well.
Further economic concerns have arisen from Moody's economists, mainly related to the weakening shekel, which could lead to higher inflation due to rising import prices. Surprisingly, economists also expressed some concerns about the state of Israeli banks, despite highlighting their stability.
During one of the meetings, Moody's economists warned that "due to the political situation resulting from the judicial overhaul, we see negative signs in the Israeli market, as the seeds of future economic troubles have already been sown although disaster is not yet looming thanks to the economy's strength in recent years."
According to Moody’s representatives, there is significant concern that the Israeli economy may not be able to sustain the lack of integration of the ultra-Orthodox and Israeli-Arab sectors into the workforce in the coming years due to their substantial population growth. This could seriously impact Israel's market and economy in the future.
The judicial overhaul will have an impact
Moody's current credit rating for the Israeli economy is A1, which is considered high. This rating is among the top 20 highest-rated countries globally following the COVID-19 pandemic, when major credit rating agencies downgraded the economies of more than 40 countries, including leading global economies.
In April, the company predicted a 3.5% growth rate for the Israeli economy in 2024, and this forecast is expected to be negatively adjusted in the upcoming report due to Israel’s economic situation in the last few months.
In a report published in April of this year, Moody's economists wrote: “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. While mass protests have led the government to pause the legislation and seek dialogue with the opposition, 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,” the report said.
A source who spoke with Moody's economists said the company expected Prime Minister Benjamin Netanyahu to fulfill his personal commitment to the public that further legislation on the overhaul would not be legislated without a wide consensus.
Since the Prime Minister recently announced that the judicial overhaul’s legislation would continue unilaterally if no consensus is reached, people who spoke with Moody's officials said that continuing the legislative processes would have a direct impact on Israel's credit rating in the coming year.
The Bank of Israel said it would announce its next decision on the interest rate ten days after Moody's releases its report on October 23, which is expected to be one of the major factors to influence the decision.