Governor of the Bank of Israel Amir Yaron affirmed that the nation’s economy was robust and would bounce back from the effects of the conflict, but he also urged the government to resolve concerns brought up by Moody’s, which had reduced Israel’s sovereign credit rating.

“The government and the Knesset act to address the economic issues raised in the report,” Yaron said, adding that this would help restore confidence of markets and rating agencies in Israel.

“We knew how to recover from difficult times in the past and quickly return to prosperity, and the Israeli economy has the strength to ensure that this will be the case this time as well,” he said.

Yaron has encouraged the government to uphold fiscal restraint and reduce spending on items unrelated to Israel’s retaliation against the Palestinian Islamist group Hamas in Gaza since the group’s slaughter of primarily civilians in Israel on October 7.

Moody’s downgraded Israel’s rating for the first time on Friday, moving it from A1 to “A2,” five rungs above investment grade. The downgrade was accompanied by a negative credit outlook, indicating that more downgrading is possible.

The battle has major political and fiscal risks, according to Moody’s, which also predicted that “Israel’s budget deficit will be significantly larger than expected before the conflict.”

If the downgrading persists or prompts more actions of this kind, Israel’s borrowing costs would increase, and in order to prevent the budget deficit from becoming out of control, budget cuts and tax increases may be necessary.

According to Moody’s, Israel’s debt-to-GDP ratio is expected to reach its peak of 67% by 2025, as opposed to 62.1% in 2023.

Though Yaron noted that “there was never any delay in the government’s debt repayments,” the ratio has nonetheless been significantly higher in the past during Israel’s economic downturns.

S&P Ratings warned Reuters last month that if Israel’s conflict with Hamas spreads to new fronts, it may have to revoke its credit rating.

A revised 2024 state budget that included additional tens of billions of shekels to fund the war and compensate victims, along with an increase in the budget deficit this year to 6.6% of GDP from 2.25%, was first approved by lawmakers last week.

In response to Moody’s action on Friday, Prime Minister Benjamin Netanyahu declared that “the rating will go back up as soon as we win the war – and we will win.”

(Adapted from TimesOfIsrael.com)

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