Investors not affected by Moody's: Only small decreases in the stock market

Israeli investors are not excited about Moody's credit rating downgrade of Israel, and the Israeli stock market responded on Sunday morning with relatively moderate declines, with a decrease of around 0.4% in the TA-35 index and around 0.5% in the TA-125 index.

Local players in the financial sector expect the stock market to continue to move in a positive trend.

Israel, who examined the rating agency's report on the credit rating downgrade from Aaa to A2 for Israel, could not remain indifferent to the arguments presented, some of which contradict each other. 

The essence of the report is an expression of an absolute lack of trust in Israeli political players, alongside complete confidence in the Israeli financial and monetary systems, which only strengthens the Israeli economy in the face of the decision to downgrade the rating. 

What is the reason for the rating downgrade?

The report, which concludes the review that the rating agency began already on October 19th, emphasizes that the main reason for the rating downgrade is Moody's estimation that the war Israel is conducting against Hamas in Gaza will have broader implications upon its conclusion.

This conclusion is possible even without extensive financial knowledge, as it continues with Moody's rating that the Israeli business environment has been affected and deteriorating due to the war.

However, the agency did not indicate the deterioration, how the war affected the business sector in Israel, in which areas, and the extent of the impact. 

Moody's did note that there is a possibility, emphasizing the word "possibility," of expanding the deficit and that the main implications are in the political risks that could weaken legislative and judicial institutions in the future. In other words, Moody's concerns are not rooted in the current economic situation or any other day in the future that it can examine or present in numerical parameters or any other formula, but rather in what might.

Again, it is worth emphasizing - it might lead to a risk of investment in Israel due to a political situation that the agency defines as one that could, and again, we emphasize - weaken its democratic institutions.

Moody's also notes that the security environment in which Israel exists increases the economic risk and that the absence of any agreement that strengthens Israel's security adds to it. However, Israel's surrounding environment was and remains as it was, as well as the absence of a political agreement with, let's say, a terrorist organization. 

The only thing that has changed in its Middle Eastern environment is its grabbing, again, with the implementation of a wide-ranging terror plan intended to harm Israel and its civilians and lead to its destruction "from the river to the sea." The rating agency also notes that it estimates that Israel's debt burden will be higher but does not indicate the factors that were not taken into account that would cause its increase and by how much. 

What is certain is that now, during Israel's downgrade, the debt burden will indeed be higher.

Moody's also acknowledges the strength and economic resilience of Israel's central bank and its ability to stabilize its financial markets quickly. It also acknowledges the strengths of the Bank of Israel, the banking sector, and government liquidity.

However, it notes that they have weakened due to the conflict and were already weak due to public controversy surrounding judicial reform. 

However, once again, the agency needs to present the expected numerical weakening in its report and how it affects Israel's economic capabilities beyond the general statement that the war weakens them.

 On the contrary, Moody's also maintains the local currency rating ceiling and the foreign currency rating held by Israel at Aaa, with the latter representing about 39% of Israel's gross domestic product. The agency also notes that even after the expected deficit, Israel's debt-to-GDP ratio will stand at around 67% until 2025, representing an increase of about 7% compared to 60% in 2022. 

How will Israel be affected?

In other words, Israel will still be more capable of meeting its obligations and will have a significantly better debt-to-GDP ratio than developed and wealthy countries.

In addition, the agency notes that the 2024 budget includes several supportive measures, including tax policies to help cover parts of the deficit, such as a 1% increase in value-added tax, which is expected to add about 0.35% of GDP each year. It should be noted that Moody's report does not directly impact the capital ratios of Israeli banks, as no local bank uses Moody's but primarily relies on S&P ratings.

For example, Micah Goldberg, Head of Equity Research at Psagot Securities, wrote, "Only if Moody's downgrade leads to an S&P downgrade is there expected to be an impact on local banks.

In our estimation, it is reasonable to assume that S&P will also downgrade Israel's credit rating shortly." However, it should be noted that whether rating agencies tend towards a left-leaning or right-leaning political direction, analysts do not like uncertainty, which only increases during a war, especially when there is no stable horizon, such as the political order that the Americans are pushing for, which allows for the desired assurances for economic factors.

Moody's report, while appearing to be more of an American pressure tactic to force Israel to accept its position on the Palestinian issue than an examination of the Israeli economy, primarily expresses a lack of trust in current political players and even cites the existing political fragmentation in Israel as one of the clouds overshadowing its economy. 

In this sense, it is possible that Moody's struck a chord with the Israeli public, now calling for a complete replacement of all party leadership from all sides of Israeli politics with a unifying one.