Continued market confidence for the Israeli shekel despite Moody downgrade

The value of the Israeli shekel increased against both the U.S. dollar and the Euro despite the negative impact that the ongoing Hamas war has had on the Israeli economy.

Kobby Levi, the head of Markets Strategy at Bank Leumi, one of Israel’s largest banks, assessed that the market responded ahead of the expected Moody downgrade of the Israeli economy.

"The shekel weakened last Thursday and Friday before publication of the credit rating report on Israel by Moody's to NIS 3.70/$ and NIS 4/€, respectively, probably in anticipation of the credit rating cut. It's a classic case of 'Buy on rumor, sell on news.' The market expected the rating cut and responded to it before it happened, and is correcting itself to the rate at the beginning of last week. In our estimation, the volatility in the financial markets will continue with a range of risk factors on the domestic and global agendas," Levi said.

Earlier in February, Moody’s downgraded Israel’s credit rating for the first time in the nation's history. The global credit agency also changed the outlook for the Israeli economy from stable to negative, a status that is unlikely to change as long as the war in Gaza continues.

While Israel's war against the Hamas terror organization has dented the Israeli $500 billion economy, it is expected to recover in 2025, as long as the ongoing war is mainly limited to the Gaza Strip. Shortly after the Hamas invasion and brutal attack in Israel on Oct. 7, the country quickly mobilized over 300,000 IDF military reservists to defend the country against the Hamas aggression in the south and the Hezbollah aggression in the north. This mass mobilization greatly impacted the economy as many reservists play crucial roles in the Israeli economy, including the high-tech sector.

Bank Leumi Chief Economist Gil Bufman believes there is light at the end of the tunnel.

"It seems like the economy is coming back," Bufman said, referring to data indicating that “demand is coming back after a “terrible month” in October. November was seen as a stabilizing month, whereas improvements in the Israeli economy were noted already beginning in December.

Bank of Israel Governor Amir Yaron is also upbeat about the Israeli economy despite the ongoing war.

"The Israeli economy is rooted on strong and healthy economic fundamentals, and is a world leader in the fields of innovation and technology," Yaron said.

The Moody's downgrade of Israel’s credit rating was preceded by several warnings of fiscal and political instability due to the Netanyahu government’s judicial reform agenda. In July 2023, three months before the outbreak of the Hamas war, Moody's already warned against investments in Israel due to the passing of the Netanyahu government’s controversial Reasonableness Standard Bill.

"We anticipate negative consequences for Israel's economy and security,” read the Moody's report. Since investors tend to be risk averse, the global credit agency argued that political and judicial instability in Israel would make international investors think twice before investing in the Israeli economy during this period.

However, the Israeli economy has a history of remarkable resilience amid difficult periods, even going back to the Second Intifada war against Israel in the early 2000s.