Moody’s Sees Positive Economic Outlook for Israel with Ceasefire Agreement

International credit rating agency Moody’s has acknowledged that the ceasefire agreement between Israel and Hamas could help mitigate immediate economic risks. However, the agency emphasizes that sustained progress is necessary to stabilize the Israeli economy in the long term.

In its recent review, Moody’s stated that, "If adhered to and further progress is made, the ceasefire agreement reduces a protracted conflict's near-term downside risks to Israel’s economy and public finances." The agreement, which is currently in its first phase, reduces potential risks, including the threat of escalation involving Iran and disruptions to global supply chains from Red Sea shipping disturbances.

This update is significant as it marks a shift from Moody's previous assessments, which forecasted no imminent improvement in Israel’s sovereign rating. However, Moody’s maintains that there are still several challenges ahead, as the ceasefire is limited in scope and duration. Negotiations for further phases of the agreement are necessary to secure long-term peace and address ongoing regional tensions.

Moody’s points to the significant economic toll the conflict has taken on Israel. The country's GDP shrank by 2.4% year on year from Q4 2023 to Q3 2024, a stark contrast to the pre-conflict annual growth rate of 4.7%. Additionally, Israel’s fiscal deficit has widened significantly, increasing by about 5-6 percentage points of GDP since the war began.

Despite this, the possibility of a gradual improvement in Israel's credit rating remains on the horizon, contingent on further progress in de-escalating the conflict. The ceasefire could also have positive effects beyond Israel, potentially easing tensions in the broader Middle East and reducing the risks of a full-scale conflict between Israel and Iran.

However, Moody’s cautions that challenges remain, particularly when it comes to extending the current truce and negotiating future phases of the ceasefire. Political and security hurdles within Israel, along with the status of remaining hostages and the reconstruction of Gaza, could impede progress towards a permanent agreement.

In its final assessment, Moody's concludes that while the ceasefire offers hope, much work remains to ensure long-term economic and geopolitical stability in Israel and the wider region.