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Israel's government must take action to tackle the economic challenges raised by rating agency Moody's, which downgraded the country's credit rating last week amid the war in Gaza, its central bank chief has said.
“In order to strengthen the trust of the markets and of the ratings agencies in the Israeli economy, it is important that the government and the Knesset act to deal with the economic issues raised in the report,” Bank of Israel governor Amir Yaron said on Sunday.
Moody’s Investors Service on Friday downgraded Israel’s credit rating from A1 to A2 with a negative outlook, attributing the move to its assessment “that the continuing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future”.
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The Israeli bombing of Khiam, a village near the southern Lebanese border with Israel. AFP -
Members of the Ghannam family check the damage to their home after an Israeli air strike hit the Rafah refugee camp in the southern Gaza Strip. EPA -
Mourners at Abu Yousef Al Najjar Hospital, in Rafah in the southern Gaza Strip. Reuters -
A rescuer puts out a fire after a car was hit by an Israeli strike in Rafah in the southern Gaza Strip. Reuters -
At Al Najjar Hospital in Rafah, Palestinians mourn after identifying the bodies of relatives killed in overnight Israeli bombardment on the southern Gaza Strip. AFP -
Palestinian families take refuge at a school affiliated with the UN Relief and Works Agency for Palestine Refugees in the Daraj neighbourhood. Getty Images -
Palestinian-Irish plastic surgeon Ahmed El Mokhallalati checks in on a Palestinian man wounded in an Israeli strike, at the European Hospital, in Khan Younis. Reuters -
A Palestinian man carries a bag of flour, as displaced Palestinians, who fled their houses due to Israeli strikes, take shelter near the border with Egypt in Rafah. Reuters -
Palestinian woman Amal Abu Hashesh, who escaped with her prosthetic leg after her house was hit by an Israeli strike, takes shelter in the European Hospital. Reuters -
Palestinians gather around a Hamas police vehicle after it was struck by an Israeli air strike in Rafah. AP -
Mother of hostage Amit Esther Buskila holds a poster of her daughter during a press conference in Paris with representatives of families of French hostages held by Hamas. Reuters -
People dance as Israeli protesters gather to block the entry of humanitarian aid trucks to the Gaza Strip at the Kerem Shalom border crossing. AFP -
Smoke billows during Israeli bombardment in Rafah. AFP -
Palestinians move along Salah Al Din road after an Israeli air strike on Al Maghazi refugee camp. EPA -
Displaced children sit on wooden pallets, as displaced Palestinians take shelter in a tent camp near the border with Egypt in Rafah. Reuters -
An Israeli tank moves along the border with Gaza in southern Israel. Getty Images -
Displaced Palestinians near the border with Egypt in Rafah in the southern Gaza Strip. Reuters -
A man carried an injured Palestinian man to Al Aqsa Hospital after an Israeli air strike in Deir Al-Balah in southern Gaza. Bloomberg -
A Palestinian woman reacts after an Israeli air strike in Deir Al-Balah. Bloomberg -
Palestinians search the site of a destroyed residential building hit by an Israeli air strike in Deir Al-Balah. Bloomberg -
A soldier visits the site of the Nova festival, with displayed photos of the people who were killed and kidnapped during the October 7 attack near the site. Reuters -
A displaced Palestinian girl, who fled her house due to Israeli strikes, arranges plants on a grave in a cemetery where she shelters, amid the ongoing conflict between Israel and Hamas, in Rafah in the southern Gaza Strip. Reuters
Israel’s public finances are also deteriorating and the country’s debt burden is expected to be materially higher than projected before the conflict, Moody's said.
The agency expects the public debt to gross domestic product ratio to peak at 67 per cent, from 60 per cent in 2022.
Before the conflict started, Moody's expected that Israel's debt burden would decline towards 55 per cent of GDP.
However, Mr Yaron stressed that the country could handle the stress due to the economy’s high potential growth and the structural surplus in the current account.
“Israel has experienced geopolitical crises in the past, when the debt to GDP ratios were much higher, and there was never any delay in repayment of government debt,” he said.
Israel's Ministry of Finance expects spending to be permanently higher by at least 1.4 per cent of GDP and potentially closer to 2 per cent of GDP if the conflict lasts longer or escalates further than currently expected.
In its baseline scenario, Moody's expects Israel's defence spending to be nearly double the level of 2022 by the end of this year and to continue to rise by at least 0.5 per cent of GDP in each of the coming years, with risks tilted towards yet higher defence spending.
The Bank of Israel estimates the cost of the conflict for the years 2023-2025 to stand at about 255 billion shekels ($64.4 billion) or 13 per cent of the GDP forecast for this year, which includes both higher defence and civilian spending as well as lower tax revenue.
Last year's budget deficit was raised from less than 2 per cent to 4.2 per cent of GDP in the supplementary budget approved in mid-December. The revised budget for this year sets a deficit of 6.6 per cent of GDP, compared with a pre-conflict forecast of about 2.5 per cent.
Israel has said it has no immediate plans to end the war raging in Gaza that began in October, which has killed more than 28,100 Palestinians.
While Israel's economy has so far managed the fallout from the war “reasonably well” with the labour force approaching pre-conflict levels, some sectors of the economy, in particular construction, are operating at much lower levels than normal, Moody's said.
There are also heightened risks of an escalation involving Hezbollah in the north of Israel, “which would have a potentially much more negative impact on the economy than currently assumed”, the agency said.
But Mr Yaron said the Israeli economy is “rooted on strong and healthy economic fundamentals”.
“We have known how to recover from difficult periods in the past and rapidly return to prosperity, and the Israeli economy has the strength to ensure that this will happen this time as well,” he said.
