Calcalist: Ismotrich ignoring Israel’s rating downgrade will cost dearly economy

The Calcalist newspaper said in a report published yesterday, Sunday, that the downgrade of the credit rating by Moody’s constitutes a serious economic warning signal, and it is not just a passing measure, but rather requires it to be part of the government’s discussions on sensitive issues related to war management and public policy.

This measure – according to Calcalist – carries with it deeper repercussions than just numbers, as it directly affects investors’ confidence in the Israeli economy, and Israel’s ability to finance itself at reasonable costs in the future.

The newspaper says that although Moody’s could argue about the measure, as did Yali Rotenberg, the accountant general of the Israeli Ministry of Finance, who described the decision as “exaggerated and unjustified,” overlooking this serious cut could lead to long-term negative consequences for the economy. Israeli.

Downgrading and its implications

A credit rating is not just a number, it is a measure of how the outside world views the Israeli economy. When a well-known and experienced agency such as Moody’s makes a decision to downgrade Israel’s rating, this indicates the presence of real risks related to the country’s financial and economic stability, according to what the newspaper reported.

The report indicated that the evaluation issued by rating agencies is not only a reflection of reality, but also works to “shape” this reality, as it greatly affects how potential investors view the Israeli economy. In other words, decision makers should avoid underestimating the seriousness of this reduction and take action to reduce potential negative impacts.

• High interest cost

In a press conference, Finance Minister Bezalel Smotrich said, “I am not concerned about the rating downgrade. This does not worry me… I did not notice that the rating downgrade increased interest rates.”

Smotrich tried to downplay the importance of the rating downgrade, arguing that Israeli bonds were already valued at the BBB level, which means that the impact of the downgrade is not critical, in addition to the fact that most of the Israeli debt is internal.

But Calcalist finds this logic to be flawed in several ways. A downgrade may provoke sharper reactions in the markets, which will lead investors to demand higher interest on Israeli debt.

This means that the cost of borrowing will increase not only in foreign markets but also within Israel itself, putting additional pressure on the state budget.

Calcalist: The continuation of the war creates an environment of uncertainty that directly affects investor confidence and economic stability.

• Impact on investment

According to a study published in June 2023 by two Bank of Israel researchers, Noam Michelson and Roi Stein, a rating downgrade actually leads to an increase in bond yields of about 0.3% for every downgrade across the three rating agencies.

Based on this model, the recent downgrade is expected to lead to a 0.2% increase in bond yields just because of the downgrade itself, and this would make the cost to the Israeli economy much greater than some think.

• Future threat to the state

The biggest mistake in the perception that the impact of the rating downgrade is limited is that this downgrade does not only affect the interest cost, but extends to affect the image of the entire Israeli economy.

A downgrade could negatively impact investment rates in Israel and even immigration trends, meaning the impact could be deeper and longer-term. As international companies and investors look to countries with high credit ratings to invest in; So downgrading the rating makes Israel less attractive for these investments.

Wrong assumption

In another comment, Smotrich said, “After the victory, the ranking will return to its real level.” However, the Calcalist report finds that this assumption ignores the fact that the continuation of the war creates an environment of uncertainty that directly affects investor confidence and economic stability.

The report indicates that the idea that the rating will automatically return to its previous level once the war ends is an oversimplification of matters that does not take into account the economic and political complexities associated with credit ratings.

The need for a clear plan and enhanced confidence

According to the Calcalist report, the Israeli government needs to seriously consider the economic risks represented by low economic growth and a high debt-to-GDP ratio.

The report indicates that the government needs a clear economic strategy to deal with the potential financial repercussions, with a focus on how to enhance the confidence of local and international investors.

Calcalist explains that officials should learn from the ratings agencies’ reports, rather than ignore or downplay them, as these reports relate to how the international community views Israel, and if the government continues to act in disregard of these warnings, this will lead to more economic pressure.