Israeli economy not as resilient to war as before – Firstpost

While Israel is basking in the afterglow of its recent military success (the elimination of Hezbollah leader Hassan Nasrallah), looming economic difficulties cast a long shadow over the country’s future. The Israel Defense Forces dealt a crucial blow to one of their most formidable enemies, and the nation rejoiced. But as many Israelis celebrate, a more serious reality is emerging in the financial arena. Moody’s decision to downgrade Israel’s credit rating from A2 to Baa1 raises critical questions about the country’s long-term financial health and prompts analysts to consider the broader consequences of ongoing military interventions on the country’s economy.

A downgrade with profound implications

Moody’s downgrade of Israel’s credit rating marks one of the sharpest fiscal setbacks in almost three decades. Unlike past military conflicts where the country’s economic resilience was clearly evident, this time the signals are more worrying. Accordingly Jerusalem Post He emphasized that this two-notch rating downgrade is not a routine financial fluctuation, but a serious indicator of deeper systemic problems. The agency’s analysis makes clear that concerns are growing about Israel’s ability to recover quickly, especially given the protracted nature of the current military conflict and the lack of a clear exit strategy.

Although Israel’s credit rating remained stable even during the Second Intifada, the current downgrade reflects a more important problem: the perception of ineffective governance. Beyond the immediate costs of war, Moody’s analysis indicates that Israel suffers from institutional weakness, political instability and an inability to address rising tensions over military service exemptions for its ultra-Orthodox population. This failure to implement meaningful reforms has diminished international confidence in the government’s capacity to manage not only military challenges but also its fiscal responsibilities.

The cost of borrowing is increasing

The direct consequence of Moody’s downgrade was an increase in borrowing costs, which threatens to strain the already overburdened national budget. Professor Dan Ben-David from Tel Aviv University said: Jerusalem Post It is stated that Israel’s budget deficit, already swollen due to war-related spending, will now face even higher interest costs, which will inevitably cut off the financing of critical domestic services such as health, education and defense. As borrowing becomes more expensive, the government will have to make difficult choices that will potentially sacrifice long-term investments in social infrastructure to cover war costs.

Moody’s decision to downgrade Israel’s credit rating goes beyond the current conflict. The agency expressed concern about Israel’s governance problems and the lack of a comprehensive post-war recovery plan.

Private sector is under stress

The ripple effect of the downgrade extends far beyond government borrowing. Israeli times He stated that businesses, especially those using loans, will now face higher interest rates, which will increase costs for consumers. As borrowing becomes more expensive for companies, it can lead to higher prices in various sectors, increasing inflationary pressures in the country. In August 2024, Israel’s inflation rate stood at 3.6 percent; this figure was already above the government’s target range of 1 to 3 percent. This inflation, coupled with rising borrowing costs, is likely to continue and place a greater burden on the average Israeli household.

The impact on businesses doesn’t end with rising borrowing costs. There are fears of layoffs and delayed investment projects as international companies reassess the risks of doing business in Israel. Israel’s private sector, especially small and medium-sized businesses, will likely bear the brunt of this downturn, with many companies facing the threat of closure due to rising costs and declining consumer spending power.

Long-term financial risks

Israeli times He said that this downgrade could create a snowball effect that would negatively affect savings portfolios, pension funds and other investment instruments. Government bonds will now carry greater risks, potentially reducing their value and reducing returns for ordinary Israelis.

As Israel’s public debt increases, the country’s financial future becomes more uncertain. Accordingly Al JazeeraThe Bank of Israel estimates that war-related costs for 2023–25 could be $55.6 billion and that a combination of higher borrowing and budget cuts will be required to meet these obligations. There is little room for error in Israel’s fiscal management, with the country’s debt-to-GDP ratio currently remaining above 70 percent and the public deficit expected to reach 7.8 percent in 2024.

While Smotrich disagreed with current forecasts, he expressed strong confidence that the deficit would fall to 6.6 percent by the end of the year. However, this optimistic forecast may not coincide with the realities on the ground. As military spending continues to rise, particularly artillery charges for reservists and the Iron Dome defense system, the pressure on public finances will also increase. Fitch Ratings echoed these concerns, predicting that military spending will permanently rise by 1.5 percent of GDP, making it difficult for the government to rein in its debt in the near future.