Israeli economics platform Calcalist said that there are expectations that Moody’s is preparing to lower Israel’s credit rating again, which could push the Israeli economy into a state of deeper financial uncertainty.
If such a downgrade occurs, investors will likely reassess the quality of Israeli debt more carefully, the platform said, potentially reducing their exposure and reducing risk.
Calcalist notes that this scenario would force the government to raise unprecedented amounts of money, further exacerbating an already fragile financial situation.
The platform stated that one of the most acute concerns is the significant decline in expected US aid. Initially, Israel expected to receive $8.7 billion in 2024, but current estimates indicate that the amount received may only reach $3.5 billion, with $5.2 billion confirmed not to arrive this year.
This sudden shortfall, according to Calcalist, represents a financial gap of about NIS 18-20 billion ($4.8-5.4 billion), which is equivalent to about 1% of GDP.
As a result, the Ministry of Finance may have to increase the spending ceiling and the budget deficit by 1% of GDP, which would require opening the 2024 budget for the third time, which is unprecedented in the country’s financial history.
In response to these developments, Finance Ministry officials are struggling with how to deal with this unexpected blow. The 2024 budget has already been opened twice due to various financial pressures.
The first was after the events of October 7, which led to adjustments in March 2024, and again on the 12th of that month, which included an additional NIS 3.4 billion (about $900 million). Now, the ministry faces the possibility of reopening the budget again to cover this growing financial gap.
Do taxes cover the gap?
The platform says some tentative hope has emerged with the June tax revenue forecast revised upward from NIS 449.1 billion ($119 billion) to NIS 465.3 billion ($124 billion), an increase of NIS 16.2 billion ($4.3 billion).
While this growth in tax collection provides a temporary cushion against the fiscal deficit, it does not necessarily indicate a sustainable recovery, as it may only delay the country’s inevitable fiscal challenges, Calcalist said.
Although the annual tax collection rate rose to 4.8%, compared to the negative trend at the beginning of the year, this increase could easily be reversed if the economic situation worsens.
Likewise, consumer spending, which has shown signs of resilience with credit card purchases up 9% in July compared to the same period in 2023, may not be as promising as it seems.
The modest 2% increase from June suggests that any improvement in consumer activity is fragile at best, offering only a faint glimmer of hope in an otherwise uncertain economic environment.
The Finance Ministry remains cautious, acknowledging that such positive signs are likely to be unsustainable given the current uncertainty.
Analysts are already warning that this surge in domestic consumption may be a temporary phenomenon, driven mainly by Israelis choosing to stay in the country due to high travel costs and limited availability of flights amid ongoing security concerns.
It is highly questionable whether this trend will continue into the latter part of the year, making officials cautious about making any overly optimistic forecasts about the country’s financial outlook.
Defense spending increases amid tensions
The expected shortfall in US aid raises particular concerns about Israel’s defense budget, according to Calcalist. The Israeli military has already earmarked $5.2 billion for special defense projects, reflecting the gravity of the situation. If the money does not come from the United States, the Israeli government will have to find the money internally, meaning Israeli taxpayers could bear the burden.
Matters are further complicated by growing geopolitical tensions, particularly with Hezbollah in Lebanon, according to the same platform. If these tensions escalate, Israel could find itself in a costly military conflict that far exceeds the financial requirements of its war on Gaza. This would require a further increase in defense spending, likely leading to a fourth budget review in 2024, which would plunge Israel’s public finances into a state of deep chaos.
As of last August, even before tensions in the northern region escalated, government spending growth was 36%, compared to a planned 14%, with non-war spending increasing by 8.3% versus a forecast of 4.9%.
Although these numbers have been gradually declining since the beginning of the year, it is unclear whether this trend will continue, especially if a comprehensive northern front erupts.
Credit rating downgrade
Calcalist said Moody’s recent visit to Israel has heightened speculation about an imminent downgrade of the country’s credit rating. The agency has previously indicated that an escalation of the ongoing conflict would be sufficient justification for a definite downgrade.
The platform notes that there is a real possibility that Israel’s rating will be downgraded from A2 to A3, or even to Baa1, indicating a move from “high-medium” to “low-medium” investment quality.
This downgrade could have serious implications for Israel’s financial position. While the Baa1 rating is still considered investment grade, it is seen as significantly riskier, and some institutional investors may avoid investing in bonds in this category.
Even those who continue to invest may reassess the quality of Israeli debt more carefully or reduce their exposure, forcing the government to raise huge sums to stabilize the economy.
Senior officials have expressed concern about a scenario similar to the financial crisis that hit the UK during Liz Truss’s short tenure. Back then, poor fiscal policy led to a serious financial crisis, with the Bank of England stepping in to buy government bonds to create demand and reduce yields, preventing a complete collapse.
In Israel’s case, the stakes are much higher. Unlike the UK, which has only faced a financial crisis, Israel is on the brink of a multi-front conflict, increasing the potential for financial repercussions and making the country’s economic outlook more precarious.
