In a critical assessment, international credit rating agency Moody’s has identified the recently established ceasefire agreement between Israel and Hamas as a pivotal moment for the Israeli economy, providing a much-needed respite from the prolonged conflict’s devastating impact. However, the agency cautions that significant hurdles remain, and durable peace is imperative for sustained economic recovery and geopolitical stability.

Ceasefire’s Immediate Economic Impact

Moody’s’ latest report underscores the ceasefire’s potential to mitigate the short-term risks to Israel’s economic and fiscal health. “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 report states. The agreement also alleviates fears of a broader regional escalation, particularly one involving Iran, and mitigates global supply chain disruptions caused by Red Sea shipping instability.

Despite these encouraging developments, Moody’s maintains a cautious outlook, emphasizing that the ceasefire’s limited scope and duration—currently confined to Phase 1—necessitate further negotiations to achieve a lasting peace. “A permanent cessation of hostilities and a meaningful reduction in regional geopolitical tensions are essential to ensure long-term stability,” the report adds.

The ceasefire agreement between Israel and Hamas in Gaza reduces the risks to Israel's public finances and could improve its sovereign credit rating, Moody's Ratings said on Tuesday.https://t.co/TNRAKV03nz

— The Jerusalem Post (@Jerusalem_Post) January 21, 2025

Credit Rating Implications

This update marks a potential turning point following Moody’s September downgrade of Israel’s sovereign rating by two notches to Baa1 with a negative outlook. The agency’s latest tone suggests that substantial progress in stabilizing the security situation could pave the way for a future rating upgrade. Previously, Moody’s had all but ruled out any near-term improvement.

Economic Devastation in Numbers

The report paints a stark picture of the war’s toll on Israel’s economy. Real GDP contracted by an average of 2.4% year-on-year from Q4 2023 to Q3 2024, a sharp reversal from the robust annual growth of 4.7% experienced before the conflict. Meanwhile, fiscal pressures have mounted, with Israel’s central government deficit widening by approximately 5-6 percentage points of GDP compared to pre-war levels.

“Despite government measures to mitigate fiscal deterioration, the conflict has significantly weakened Israel’s fiscal and economic metrics,” Moody’s notes. While the ceasefire offers hope for stabilization, the agency warns that reversing these economic setbacks will be a slow and arduous process.

Broader Regional and Global Implications

The ceasefire’s potential benefits extend beyond Israel’s borders. “For the broader Middle East region, a durable ceasefire would reduce tail risks stemming from escalation that resulted in a full-scale conflict between Israel and Iran,” Moody’s states. The agency also highlights the potential for alleviating disruptions to global supply chains, particularly those reliant on Red Sea shipping routes.

Gaza ceasefire should take pressure off Israel's credit rating, Fitch says - https://t.co/WIdOfoknli #Gaza #ceasefire #should

— Insight Chainz (@InsightChainz) January 16, 2025

Challenges to a Permanent Agreement

While the ceasefire provides a glimmer of hope, Moody’s emphasizes the formidable obstacles to achieving a permanent resolution. “Given the challenges in extending the shorter November 2023 truce, similar difficulties are likely to arise in negotiating subsequent phases,” the agency warns. These phases involve complex issues such as the release of remaining Israeli hostages, the withdrawal of Israeli troops from Gaza, and the reconstruction and governance of the territory.

Domestic political dynamics and security concerns further complicate the path to a lasting agreement. “These factors may impede progress and heighten the risk of renewed hostilities,” Moody’s cautions.

Fitch Ratings assesses Gaza ceasefire will reduce pressure on Israel’s credit rating https://t.co/gBPB8IV5dh#Israel #IsraelEconomy #FitchRatings #CreditRating #EconomicAnalysis #GazaCeasefire #GlobalEconomy pic.twitter.com/P0HlDj1F0G

— All Israel News (@all_israel_news) January 19, 2025

A Fragile Hope for the Future

Despite these challenges, the report signals a tentative optimism. “Effective implementation of the ceasefire agreement and additional progress towards a durable de-escalation of hostilities in Gaza would reduce downside risks to the sovereign’s credit strength,” Moody’s concludes.

In summary, the ceasefire represents a critical juncture for Israel, offering a pathway to economic and geopolitical stability. Yet, the journey ahead remains fraught with uncertainties, and the stakes could not be higher. As Israel navigates this precarious moment, the global community watches closely, hoping for a resolution that brings enduring peace to a region long plagued by conflict.