The credit rating downgrade of Israel on February 9, 2024, by the rating agency Moody's is a dramatic and highly consequential economic event that must be taken seriously.
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All Israeli citizens, regardless of political affiliation, will be affected by its ramifications: the downgrade will raise the interest rates that Israel will have to pay on its loans, thus increasing the financing costs for the country and exacerbating the burden of debt, which continues to grow due to significant deficits in the budget; the Israeli economy will be perceived by markets and investors as a riskier place for investments, affecting the business sector and economic growth rates; the increased cost of credit for the banking system will be passed on to bank customers, leading to higher mortgage rates; moreover, the credit rating downgrade could trigger currency fluctuations, price hikes, and accelerate inflation, affecting households across the board.
Most economists and international rating agencies have recently issued warnings on this matter, and it's difficult to avoid significant disappointment and frustration if these warnings are not fully addressed - as the writing was on the wall.
The State of Israel is engaged in a multi-faceted struggle: military, social, economic, political, legal, and reputational, among others. These systems are interconnected: they influence each other and are influenced by each other.
Therefore, we cannot delude ourselves into thinking that the credit rating downgrade will be a short-term event that will automatically end with the conclusion of the military conflict. It's not that simple.
It's not just about the war. The risks and budgetary burdens will persist beyond the end of the war (which itself is difficult to define). The credit rating downgrade reflects a comprehensive and critical assessment by the rating agencies of policymakers' handling across various domains.
It's challenging to separate the reasons for the military disaster of October 7, from those of the economic catastrophe of February 9. In many ways, both reflect systemic failures, stemming from arrogance, negligence, and disregard for professional recommendations.
This hasn't always been the case. In the past, Israel and its economy successfully coped with wars and other challenges, such as the COVID-19 crisis, without any credit rating downgrade. On the contrary, for many years, the rating consistently improved.
So, what now? Policymakers must draw immediate conclusions and prevent further deterioration. To begin the process of restoring Israel's economic reputation and brand, which suffered from the credit rating downgrade, dramatic action is required even before the publication of ratings by other agencies like Standard & Poor and Fitch.
The 2024 state budget has already passed its first reading in the Knesset and is currently undergoing second and third readings. This presents an opportunity to redefine priorities and reflect them in the budget.
Business as usual is no longer an option. There is still time to decide on closing unnecessary government offices that do not contribute to key goals and cutting funds allocated to resolve narrow coalition issues. "Broad cuts" do not reflect the necessary prioritization.
Furthermore, given the significant importance that all rating agencies attach to the independence and integrity of the judicial system, it is desirable for the government and the Knesset to formally remove legislative proposals that still threaten the independence of the judiciary and the immunity of democratic institutions. These steps will help to clearly demonstrate that the lessons learned from the events of October 7, and February 9, have been heeded.
- Professor Jacob Frankel is the recipient of the Israel Prize in Economics, chairman of the Frankel-Zuckerman Institute for Global Economics at Tel Aviv University, and served as the governor of the Bank of Israel from 1991 to 2000