In an unprecedented move, Moody’s announced on Friday night that Israel’s credit rating has been downgraded from A1 to A2. While this marks a significant shift in the Israeli economy, it seems that investors were not moved by the announcement. The local flagship index, Tel Aviv 35, only saw a slight decline of about 0.6%. However, with the exception of one index, the banking index, which fell by 1.7%, the rest of Israel’s economic indicators showed minor declines.
At the same time as Moody’s announcement on Friday night, history was also being made on Wall Street. The S&P 500 index broke its all-time record and closed at more than 5,000 index points for the second time in a month. According to Alex Zabrzynski of Meitav Investment House, “the behavior of the global stock market indicates that it has overheated.”
The Israeli stock market has underperformed its American counterpart over the past year. From October 2023 to November 2023 (the beginning of the current rally), the S&P 500 increased by about 22%, while the Tel Aviv 35 only increased by about 13%. Bernard Menor, investment manager at IBI Portfolio Management believes that America is still better than Israel due to geopolitical risk and other factors that are not favorable to future growth.
However, it appears that our economic elite does not place economic considerations first in their priorities. This is reflected in Moody’s report which points out political, coalitional and sectoral factors at play instead of future growth. The government deficit is expected to grow in the short term and war expenditures will increase. Additionally, economists estimate that yields on short-term government bonds will rise in coming period meaning state will be required to pay more to bond investors thanks to downgrade decision.