Moody's Downgrades Israel's Credit Rating for First Time in Country's History, Outlook Lowered to 'Negative' - Israel News - Haaretz.com
Moody's credit rating agency announced on Friday that it is lowering Israel's credit rating from A1 to A2 – the first time rating downgrade in the country's history – and to attach a "negative" outlook to the new rating.
This is the first rating downgrade suffered by the Israeli government since its bonds began to be rated by international credit rating agencies some three decades ago.
Moody's decision to attach a "negative" outlook to the downgrade has caught officials in Jerusalem by surprise. The outlook means that the agency sees it as probable that the country's credit rating will be lowered even further in the foreseeable future.
As result of the downgrade, the Israeli government's rating is currently A2. This rating, which is equivalent to an A rating on other credit rating agencies' scale, was Israel's rating between 2000 and 2008, before Moody's raised it to A1 – equivalent to A+ at other companies.
While it is still too early to determine the financial ramifications of the move, it is first and foremost a blow to Israel's international image.
In theory, when a country's credit rating drops, its bonds become less attractive for investors, and they may demand a higher interest rate for their money. Therefore, the government's expenses on interest might increase as result of the move.
The Israeli government is already required to increase bonds issuance in order to finance its deficit – the gap between its revenues and expenses – which jumped to 4.8% of GDP at the end of January 2024 (accumulated deficit in the last 12 months) and is expected to reach 6.6% of GDP at the end of 2024.
However, according to many economists and investors, the economic damage of the war in Gaza, or at least of the most likely scenarios for its development, is already reflected in the interest rates the government has had to pay when raising funds abroad.
Israeli soldiers near the Gaza Strip border, in southern Israel, Friday, in December.Credit: Ariel Schalit / AP
Following the war's outbreak, the spread between the interest rate on 10-year Israeli government dollar bonds and the interest rate on equivalent U.S. government bonds jumped by dozens of basis points, although in recent weeks the increase has been cut back by about a half.
Another measure of risk in the credit market is the price of credit default swap (CDS) – essentially the cost of insuring Israeli government bonds. The Bank of Israel noted in its financial stability report published late last month that before the war, the price of CDS on five-year Israeli government bonds was typical for countries with Israel's credit rating, but by the end of December had jumped to a level typical for countries with a lower rating of BBB. The price remained almost unchanged from the end of 2023 until last week.
What will other rating agencies do?
The downgrade of Israel's credit rating comes after years in which it only moved up – and seemed that it would only continue to do so. In April 2022, Moody's raised Israel's credit rating forecast to "positive." However, it has not raised the rating itself since then, partly because of the political instability in the country, which led to an early election in November 2022.
In April 2023, Moody's announced that it is lowering Israel's credit rating outlook back to "stable." The agency said its decision "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 strength of governmental, economic and social institutions is one of the factors on which a country's credit rating is determined.
Following the war's outbreak, Moody's announced that Israel was in a "review for downgrade." According to its announcement at the time, this was aimed at assessing the Israeli government's ability "to implement policies to reduce the economic and fiscal impact of the conflict, and lead to recovery from the crisis in the future."
Moody's reassessment of Israel's rating took about three and a half months, and included rounds of talks between Israeli officials and representatives from the agency, in which the latter were presented with plans by Israel's political echelon, the effects of the war on the economy, and the government's plans to revise the state budget for 2023 and for 2024. The updated version of the 2024 budget cleared the first vote in the Knesset on Wednesday.
Israeli Finance Minister Bezalel Smotrich at press conference in Tel Aviv, on Sunday.Credit: Tomer Appelbaum
As part of the process, Moody's representatives were given information on the status of the fighting in the war's various fronts, and also examined social and political developments in Israel, including the changes in the composition of the governing coalition, and public discourse on reaching a deal with Hamas to secure the release of hostages.
They also followed recent rulings by Israel's Supreme Court on constitutional matters, first and foremost its decision to nullify the law seeking to strip the court of its authority to declare government decisions as unreasonable, and its decision to postpone the implementation of the so-called Incapacitation Law – two key parts of the Netanyahu government's judicial overhaul.
Israeli Prime Minister Benjamin Netanyahu and U.S. Secretary of State Antony Blinken, in Jerusalem, on Wednesday.Credit: David Azagury / U.S. Embassy Jerusalem
Other rating companies will now have to decide whether to follow in Moody's footsteps and lower Israel's credit rating as well. Fitch, another major international rating agency, placed Israel on a "Rating Watch Negative" in October, but has so far upheld its A+ rating.
A third rating agency, Standard & Poor's (S&P), is in a particularly sensitive situation, because its rating for the Israeli government's bonds of AA– is two notches higher than Moody's new rating (and one notch higher than Fitch's). About a week after Moody's and Fitch's announcements in October, and following the outbreak of the war, S&P decided to lower Israel's credit rating outlook to "negative," but has not lowered the rating itself as of yet.
Israel shares its new rating of A2 with countries like Iceland (positive outlook), Poland, Lithuania, Malta, Slovakia and Bermuda (stable outlook). Another downgrade, to A3, will place Israel in line with Portugal, Botswana and Malaysia.
The government debt – more than a trillion shekels
A credit rating – given to governments, companies and other entities that issue debt instruments, such as bonds – is an assessment by the rating agency regarding the ability and willingness of the entity in question to repay its debts in full and on time.
A country's rating is based on a variety of parameters, including economic growth, foreign trade, budgetary and monetary environment, geopolitical characteristics, as well as its internal political and governmental characteristics, such as the quality of its economic and political institutions, and the robustness of its rule of law.
The rating is meant to indicate high-quality borrowers – and warn in the event that a deterioration of the borrower's situation raises concerns as to its ability to repay loans.
The rating makes it easier for governments to raise funds through the issuance of tradable bonds in the international capital markets, in order to finance their activities. Governments normally receive most of their funding from their own citizens, chiefly through tax collection – and borrow money mainly to finance their deficit.
The debt of the Israeli government amounted to approximately 1.08 trillion shekels ($294 million) at the end of the third quarter of 2023, and has apparently increased since then due to fundraising for the needs of the war and the weakening of the shekel.
Israel's Accountant General Yali Rothenberg, as well as his deputy Gil Cohen and other Finance Ministry officials had to exert efforts since the beginning of the war to present a positive picture of the economy to potential foreign investors. As of the end of the third quarter of 2023, 125 billion shekels ($34 billion) of the government's debt has been raised in public bond issuances abroad in foreign currencies.