The Essence
For the first time in history, an international credit rating agency has decided to downgrade Israel's credit rating. Moody's also includes a negative outlook for the economy, implying the possibility of a further downgrade. The downgrade primarily reflects concerns about the impact of the war with Hamas, which could escalate into a full-scale war in the north.
Moody's acknowledges the resilience of the Israeli economy, its diversity, the independence of the legal system (the report also mentions the shelving of the legal reform), and its effective monetary policy as strengths.
However, it also warns of a period of political turmoil and notes the weakening of the executive and legislative authority against the backdrop of internal polarization. Moody's expresses concern over the lack of a clear long-term strategy and doubts the establishment's ability in Israel to formulate policies and support financial and economic measures to stabilize the situation.
Finance Minister's Response
Finance Minister Smotrich's response was damaging in itself. According to him, "Moody's announcement... does not include serious economic arguments and is entirely a political manifesto based on a pessimistic and absurd geopolitical worldview, reflecting a lack of confidence in Israel's security and national resilience, and presumably also a lack of confidence in its righteousness against its enemies.... We do not derive our national strength... from how we are judged by the world, but from a deep belief in the righteousness of our path."
Some Insights & Conclusions
Israel is at war. What is required is the management of a war economy that expresses a priority order balancing between the needs of warfare, which are a priority, and macroeconomic thought about the day after. Instead, the recently passed budget includes coalition funds and expresses sectoral-tribal thinking. Also, the surplus of unnecessary government offices at this time is not appropriate. This is not how to win a war or build an economy.
Instead of declaring that he would study the report and commit to formulating a strategy for economic growth, the Finance Minister provided a political, irrelevant, and disconnected response. This is the last thing state bond investors want. We estimate that the Finance Minister's response will be quoted in reports of other credit rating agencies, which are likely to downgrade Israel's credit rating as well.
The report mentions the Israeli government's rejection of policy plans proposed by the USA and others regarding the day after. The economic angle is not sufficiently important compared to the security angle and should not have enough weight to undermine Israel's national objectives. The problem is that the Israeli government has not even set national objectives for itself. This fact has security, policy, and also economic implications.
What can be learned from the Haredi public's reaction? Although the report implicitly criticizes the coalition funds, some of which stem from the demands of the Haredi parties, the anger of the Haredi party leaders was sparked by the Prime Minister's response to Moody's report on Shabbat. This primarily shows the disconnection of the Haredi parties from the national existence. All these join the increasingly vocal discussion about equal burden sharing, as it becomes clear that despite the media festival around a few unrepresentative cases, the Haredi society in its vast majority did not contribute to the national effort with existential implications. In everything related to national resilience and community cohesion, the issue of the Haredis' place in public life will become increasingly central.
The economic implications of the war are a target in themselves in the doctrine of 'open-ended war' or 'permanent war' of Iran, Hamas, and Hezbollah (see more here). Our enemy understands that the Israeli economy is expected to be shaken during a period of long reserve duty, while the defense budget increases and social services are cut, and while there is a possibility that Israel will face boycotts and sanctions in the future. The decline in the quality of life in Israel is almost certain.
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