Israel's economy will recover after Moody's cut, says Yaron, but action is needed. From Reuters

© Reuters. FILE PHOTO: Bank of Israel Governor Amir Yaron listens to remarks on “Monetary Policy Challenges in a Global Economy” during the International Monetary Fund (IMF) Annual Research Conference on “Global Interdependence” on November 9, 2020 in Washington, United States at

By Steven Scheer and Ari Rabinovitch

JERUSALEM (Reuters) – Bank of Israel Governor Amir Yaron said on Sunday the country's economy is strong and will recover from the effects of war, but urged the government to comply with Moody's (NYSE:) to address issues raised after the agency downgraded Israel's sovereign debt rating.

To boost market and ratings firms' confidence in Israel, it is crucial that “the government and the Knesset address the economic issues raised in the report,” Yaron said.

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

Since the Palestinian Islamist group Hamas' Oct. 7 massacre of mostly civilians in Israel, Yaron has called on the government to maintain fiscal discipline and cut spending on items unrelated to Israel's reprisals against the group in Gaza.

In Israel's first-ever downgrade, Moody's on Friday cut the country's rating from A1 to “A2”, five notches above investment grade, and left the credit outlook at negative, meaning another downgrade is possible.

Moody's noted significant political and financial risks from the war, adding: “Israel's budget deficit will be significantly larger than expected before the conflict.”

The downgrade, if prolonged or leading to more such moves, would increase borrowing costs for Israel and could lead to budget cuts and tax increases to prevent the budget deficit from spiraling out of control.

Israel's debt-to-GDP ratio is expected to peak at 67% by 2025, up from 62.1% in 2023, according to Moody's.

Still, this ratio has been much higher in the past during times of economic crisis for Israel, but “there has never been a delay in the government's debt repayment,” Yaron said.

Last month, S&P Ratings told Reuters it could lower Israel's credit rating if the war with Hamas spreads to other fronts.

Lawmakers last week approved for the first time a revised state budget for 2024 that adds tens of billions of shekels to finance the war and compensate those affected and increases the budget deficit this year to 6.6% of GDP from 2.25%.

Prime Minister Benjamin Netanyahu responded to Moody's move on Friday, saying: “The valuation will rise again as soon as we win the war – and we will win.”