Moody’s downgrades Israel’s credit rating

Global rating agency Moody's on Friday affirmed its sovereign credit rating at ‘A1 but downgraded the outlook on the Israeli government's credit ratings to ‘stable’, from ‘positive’.

In a statement, Moody's explained that the affirmation of the ‘A1’ rating reflects Israel's strong economic growth and improving fiscal strength which Moody's expects to continue in its baseline scenario. The economy has proven resilient to many economic and geopolitical shocks over the past decades and has grown at a rapid clip, helped by Israel's globally competitive high-tech industries.

Moody's concerns

Regarding the decision to downgrade the outlook, 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

Prime Minister Benjamin Netanyahu and President Isaac Herzog spoke to officials at Moody’s on Friday before the publication of the rating, in order to sway them not to downgrade the rating.

Israel's current rating ‘A1’ is an upper-medium score. This indicates that Israel is capable of repaying short-term loans.

Moody had previously warned the government of economic impacts on its proposed legislative policies and many economists echoed these concerns.

In March, Moody 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.

Fitch, another credit assessor, previously chose to maintain Israel’s A+ credit rating in March, but with a caveat of its own, “Fitch believes the reform could hurt Israel’s credit profile by weakening governance indicators or if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment.”