What contributed to this rapid rise?
There are two primary factors: the thriving high-tech sector, with major exits and sales of services and equipment, and the global trend of high interest rates, driven by the Federal Reserve’s flawed policies, which have been forced to maintain elevated interest rates.
Israel’s net foreign assets now amount to 51.7% of its GDP, another all-time high—something that Moody’s failed to acknowledge.
Moody’s also missed an essential point regarding Israel’s growth potential: Israel’s high-tech exports (seasonally adjusted) grew by 6.1% over the past year, reaching an annual total of $54.25 billion—an increase of $3.17 billion. Remarkably, much of this growth occurred during the war.
Overall, business services exports (seasonally adjusted) rose to $69.07 billion annually by July, adding $2.08 billion during this challenging period. One can only imagine what could be achieved after the war.
Moody’s has hinted that if the northern conflict with Hezbollah continues, it may consider another downgrade. The intensifying clashes with Hezbollah and Israel’s decision to return 60,000 evacuated residents to the Galilee could fuel further conflict, while the breakdown in ceasefire talks with Gaza adds more uncertainty.
According to Moody’s, these factors heighten political and geopolitical risks. The agency even argued that the Israeli government lacked a clear exit strategy from the war.
Much of this commentary stems from conversations with opposition figures and former officials who are out of touch with current realities.
Moody’s analysis is overly pessimistic.
The agency predicts that Israel’s economy will grow at an annual rate of 3% in the coming years, down from the previous growth rate of 4%—still stronger than many comparable countries.
They also project that the government deficit will rise to 7.5% this year, higher than the government’s estimate of 6.6% (for comparison, the EU’s deficit stands at 3%), and that Israel’s debt-to-GDP ratio will reach around 70% (while the EU’s debt-to-GDP ratio is 89%).
One of the biggest secrets Moody’s overlooked is that foreign investors have been returning to Israel even during the war. Foreign direct investment (FDI)—investments that grant ownership rights, such as in buildings or shares—rose to $5.9 billion in the second quarter of this year, up from $1.96 billion in the first quarter.
These figures, recorded during the peak of “Operation Swords of Iron,” mark a significant increase compared to $4.5 billion in the second quarter of 2023. Furthermore, Israel’s total foreign direct investments hit an all-time high of $248.3 billion this year, surpassing the $232.6 billion recorded last year.
Israeli high-tech companies raised $9 billion since the war started, ranking third globally, behind Silicon Valley and New York.
The American company Salesforce recently acquired two Israeli high-tech companies for a combined $2.35 billion. This shows that Israel and its companies do not need foreign credit on a net basis.
Additionally, Israel’s success in using advanced technologies, including artificial intelligence, in recent operations is expected to boost investments in the country’s cyber sector.
Moody’s also pointed out that Israel’s external debt-to-GDP ratio is 28.3% but failed to mention that Israel has a net surplus in global debts—a critical factor in determining a credit rating.
Israel’s need for credit is much less significant today than it was decades ago. The key figure that global financial markets look at when assessing a country’s strength is its balance of payments. As of June 2024, Israel’s account surplus is $23.75 billion, representing 4.62% of GDP—a 15.3% increase over the previous year.
Few countries worldwide enjoy such a large current account surplus in relation to their GDP. Israel ranks 22nd globally in absolute terms, with the EU’s current account surplus just 1.7%.
This surplus, which has lasted for over two decades, primarily stems from Israel’s flourishing high-tech sector, which accounts for 19% of its GDP. In addition, the discovery of natural gas fields such as Leviathan and Tamar has turned Israel into a net energy exporter, significantly contributing to its growing surplus. Moody’s report failed to mention any of these crucial factors.
GDP growth was slow in the second quarter of this year, rising by only 0.2%, compared to 4% in the last quarter of 2023.
However, this sluggish growth should be seen in the context of the ongoing war. Recently, the Israeli economy has shown a clear recovery trend.
Tax revenues have risen by 10% since the beginning of the year, and VAT revenues have increased by 5% in the first eight months, totaling NIS 87.6 billion. Exports have also grown, with industrial exports rising by 24% annually, marking a significant improvement. Additionally, the construction and hospitality sectors have shown signs of recovery.
Despite the war, private consumption per capita rose by 4.6% annually in the second quarter, and the unemployment rate has dropped to 2.6%, one of the lowest in the world. Full-time employment increased to 78.2%, with job vacancies rising by 18% compared to last year.
However, in light of these positive trends, the government must not become complacent.
Taxes should be raised at the start of 2025 to prevent further budget deficits and fund the defense system’s transformation. This will require at least NIS 30 billion annually, if not more.
Sadly, the current government is dragging its feet in finalizing the 2025 budget. A national unity government focused on the economy is needed. If the government does not act, the euphoria following Nasrallah’s elimination could quickly become economic despair.
