Rating agency Moody’s announced last night (Friday) a double downgrade of Israel’s credit rating with a negative growth forecast. In a detailed report, the agency sharply criticized the conduct of the Israeli government and its avoidance of taking steps to reduce the deficit. This decision is expected to have many consequences on the cost of living and on the pockets of all of us.
The downgrade is expected to affect quite a few areas: including taxes, employment, import costs, high-tech, mortgages, public services, foreign investments.
Will shopping at the supermarket become more expensive?, photo: storyblocks
The drop in the credit rating made the credit that the state raises more expensive
When the credit rating goes down, it is more expensive for the State of Israel to take out loans, which hurts its ability to provide services to the citizens of Israel. Ronan Menachem, the chief economist of Bank Mizrahi Tefahot, warns of serious consequences of the downgrade. According to him, “the direct effect is the increase in the cost of credit that the state raises directly abroad and indirectly in the local capital market.”
Menachem explains that as a result, the government debt will increase and the ratio between the deficit and GDP will rise. He warns that the state will be forced to increase the tax burden on the public, which will harm disposable income and lead to a decrease in private consumption and an increase in the cost of living. “The savings will also decrease and make investments in the economy more expensive,” he adds.
The effect of lowering the credit rating on imports and mortgages
Menachem emphasizes that the downgrade will worsen the existing problems in the import sector. He explains that the war has already created import restrictions because of the activities of the Houthis and the boycotts from the direction of Turkey, and now “any downgrading that increases the cost of recruitment will also affect import costs and make it more expensive.” Regarding the mortgages, Menachem points out that the effect of the downgrade is not direct, and that additional factors such as demand and supply considerations affect their cost.
The effect of downgrading the credit rating on interest rates and economic growth
Regarding the interest rate, Menachem explains that it does not directly depend on the downgrade. According to him, the Bank of Israel focuses on considerations such as the return of inflation to the target level. However, he emphasizes that “the Bank of Israel, like Moody’s, wants to see a government plan for an orderly reduction of the deficit and the debt and a breakdown of the adjustment of income and expenses.” Moody’s lowered its growth forecast for 2025 from 4% to 1.5% and expects a high deficit of 6% of GDP, indicating significant economic challenges in the near future.
“Savings will also reduce and make investments in the economy more expensive”, Photo: .
High-tech may also be affected by the lowering of the credit rating
Modis explained in the report they distributed about the downgrade, that the damage to high-tech, the leading growth engine of Israel’s economy, may be significant. Companies can easily move their operations outside of Israel and investors may fear entering the Israeli market. A high-tech forum for Israel that includes CEOs and CEOs “Lim from the high-tech sector said that the downgrade of the credit rating has serious effects on Israeli high-tech and may cause investors to fear investing in Israel: “The high-tech industry, which for years was a major engine of growth, is at risk of a significant slowdown.”
The impact of the downgrade on the construction industry and the labor market
The president of the Boni Ha’aretz Association of Contractors, warns of the consequences of the downgrading on the construction industry. He explains that the increase in financing expenses for the national debt will deepen the deficit and make it difficult for the government to adopt an effective policy against inflation. Sargo warns that the Bank of Israel may raise the interest rate, which will burden mortgage holders and lead to a decrease in demand for apartments and in construction starts.
Raul Sargo, president of the Ha’aretz Construction Contractors Association, photo: PR
Dror Litvak, CEO of ManpowerGroup Israel, adds to the gloomy picture with reference to the labor market. He explains that the increase in financing costs will lead to a decrease in investments in the private sector, especially from global companies. Litvak warns: “There will be fears of layoffs due to the reduction of those projects,” and adds that The combination of the decline in economic security with the security situation may lead to the continuation of the recession and significant damage to the labor market.
“The fear of employee layoffs will rise,”
The consequences of downgrading the credit rating on the economy and public services
Dr. Gali Ingber from the College of Administration provides a comprehensive picture of the economic consequences. She points out that the cost of the war, estimated at approximately NIS 250 billion, is largely raised through loans on the world market. Dr. Ingber warns against the need for a significant increase in taxes and extensive cuts in services to the citizen. “This means that we will have to wait two years for appointments with doctors, the education system will suffer significant cuts, the traffic jams on the roads will be longer,” she explains, adding that the security sector may also be affected. Finally, she warns against a possible increase in the dollar exchange rate, which will lead to another wave of price increases in all areas of life.
“A significant increase in taxes and extensive cuts in services to the citizen”, photo: Kobi Ashkenaziteino? We will fix it! If you found an error in the article, we would appreciate it if you shared it with us
