©Reuters. FILE PHOTO: Bank of Israel Governor Amir Yaron listens to remarks on “Monetary Policy Challenges in a Global Economy” during the International Monetary Fund’s (IMF) annual research conference on “Global Interdependence” in Washington, DC, USA, 9 November 20
By Steven Scheer and Ari Rabinovitch
JERUSALEM (Reuters) – Bank of Israel Governor Amir Yaron said on Sunday that the country’s economy is strong and will recover from the impact of the war, but called on the government to address issues raised by Moody’s (NYSE) after that the agency downgraded Israeli sovereign debt. credit rating.
To increase the confidence of markets and rating firms in Israel, it is crucial that “the government and the Knesset take action to address the economic issues raised in the report,” Yaron said.
“We have been able to recover from difficult times in the past and quickly return to prosperity, and the Israeli economy has the strength to ensure that happens again this time,” he said.
Yaron, after the October 7 massacre of civilians in Israel by the Palestinian Islamic group Hamas, urged the government to maintain fiscal discipline and cut spending on items not related to Israeli reprisals against the group in Gaza.
In the first-ever downgrade for Israel, Moody’s cut the country’s credit rating to “A2,” five notches above investment grade, from A1 on Friday, and kept its credit outlook at negative, meaning a further downgrade it’s possible.
Moody’s cited material political and fiscal risks from the war, adding that “Israel’s budget deficit will be significantly larger than expected before the conflict.”
The downgrade, if prolonged or led to further such moves, would increase financing costs for Israel and could lead to budget cuts and tax increases to prevent the budget deficit from spiraling out of control.
Israel’s debt-to-GDP ratio, Moody’s noted, looks set to peak at 67% by 2025, up from 62.1% in 2023.
However, that ratio has been much higher in the past during times of economic crisis for Israel, but “there has never been any delay in debt repayment by the government,” Yaron said.
Last month, S&P Ratings told Reuters it could lower Israel’s credit rating if the war with Hamas spreads to other fronts.
Lawmakers last week gave first approval to a revised state budget for 2024 that added tens of billions of shekels to finance the war and compensate those affected, as well as an increase in the budget deficit this year to 6.6 % of GDP from 2.25%.
Prime Minister Benjamin Netanyahu reacted to Moody’s move on Friday, saying “the ratings will go back up as soon as we win the war – and we will win.”