Impact of Moody's Credit Rating Downgrade on Israel's Economy
Israel's recent credit rating downgrade by Moody's to Baa1, accompanied by a negative outlook, is poised to have significant repercussions on the lives of its citizens. As reported by the Israeli economic newspaper Globes, the downgrade will likely lead to higher debt costs, increased taxes, and a potential slowdown in economic growth. The ongoing conflict in Gaza has heightened the perceived risks associated with Israeli investments, prompting lenders to demand higher interest rates.
The immediate effects of the downgrade are already being felt, with a decline in Israel's ability to repay debts and a corresponding rise in the cost of borrowing. Chen Herzog, chief economist at BDO, emphasized that this creates a domino effect: as interest rates on government debt rise, the fiscal deficit widens, necessitating increased taxes and reduced government spending. This cycle could exacerbate the economic slowdown, impacting everyday Israelis.
Consequences for Savings and Financial Markets
The downgrade's ramifications extend beyond government finances; it will directly affect the savings and pensions of ordinary Israelis. With a lower credit rating, pension funds and savings accounts are likely to experience diminished performance, leading to higher prices and erosion of wages. Currently, inflation stands at 3.6%, and experts predict it could rise further as interest rates on corporate debt increase due to the heightened risks perceived by investors.
Moreover, the downgrade has led to the downgrading of five major Israeli banks—Leumi, Hapoalim, Mizrahi Tefahot, Discount, and First International—by Moody's. Harel Gillon, co-CEO of Oppenheimer & Co. in Israel, noted that the banks, which are heavily reliant on the local economy, will face rising costs in raising debt, ultimately impacting their profitability. As the economic landscape shifts, Israelis must brace for a challenging financial future marked by increased costs and reduced financial security.
