Israel’s rating downgrade with negative outlook surprises markets

ISRAEL - In Brief 11 Feb 2024 by Jonathan Katz

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Moody’s decision surprises markets The downgrade from A1 to A2 was largely expected by markets towards the end of last week. But the combination of a downgrade with a negative outlook was not expected (by the MoF as well). According to Moody’s, the negative outlook was due to the risk of escalation of hostilities in the North. On the other hand, Moody’s praised the cancelling of the judicial overhaul legislation. Other rating agencies, especially S & P are likely to downgrade as well. Meanwhile, there was some positive economic news: January witnessed strong tax revenues and a fiscal surplus of 2.5bn ILS (in part seasonal). The MoF had expected a fiscal deficit of 1-1.5bn. The CBS business sentiment reflects further gradual recovery in activity in most sectors. On the other hand, CBS Consumer Confidence declined 3 points to -28, approach the low Covid levels in 2020, impacted by the prolonged warfare and lack of progress in releasing prisoners and reaching a ceasefire. FX: The shekel weakened by 1% against the basket towards the end of last week on expectations of Moody’s downgrade. Further downward pressure was apparent in the options market yesterday. The BoI did not intervene in the FX market in January. FX Reserves increased slightly to 206.1bn USD. In December, Israeli institutions were net FX buyers of 4.2bn USD following 10.5bn in November. Policy rates: The Moody’s downgrade and resulting volatility in the shekel certainly reduces the probability of rate cut in two weeks, but we await January’s CPI to be released Thursday (see below). The Bond Market: The bond market turned negative yesterday on the Moody’s downgrade and negative outlook. The 10-year Israel bon...