Standard & Poor's representatives today completed their annual visit to Israel and the rating company will soon make its critical decision for the local economy: the credit rating on Israel's debt.
Two S&P representatives met Minister of Finance Ronnie Bar-On, Ministry of Finance director general Yarom Ariav, Accountant General Shuki Oren, Budget Director Ram Belnikov, and Governor of the Bank of Israel Prof. Stanley Fischer. The meetings were aimed at obtaining a comprehensive view of Israeli economic developments and the fiscal conduct of the government, which is the key item that the credit rating focuses on.
S&P's last visit to Israel was a year ago, after which it raised its credit rating for Israel. However, the climate for the current visit is utterly different and more hostile. The global capital market is mired in deep crisis, the target markets for Israeli exports are in slowdown if not in outright recession, the Israeli economy is also heading for a slowdown, and most importantly, Israel has no functioning government, which results in partisan political factors outweighing the undertaking of a responsible economic policy.
A senior Bank of Israel official told "Globes", "The rapid growth of recent years, which were accompanied by responsible fiscal policies, caused us to think that the rating companies only know how raise ratings. We've forgotten that the rating companies also know how to downgrade, especially in times of economic and financial instability, and in the case of Israel, political instability as well."
A senior Ministry of Finance official said, "If the cabinet hadn’t passed the budget, it's doubtful if Israel's rating would not have been lowered. They were worried about the lack of political stability. Bar-On told them that the deficit target was 1% of GDP, the increase in government spending target is 1.7%, and that the debt-to-GDP ratio is still dropping and has fallen below the 80% level. The cabinet has approved the budget and there's nothing to fear. We've isolated the economy from politics, and this is the pattern that has repeated itself and characterized economic policy of the past six years."
It remains to be seen if the Ministry of Finance officials were persuasive, and the answer won't come for at least two months. Last time, the S&P representatives visited Israel in September 2007, and S&P announced its rating upgrade for Israel in late November. This time, S&P is very worried about what the Knesset will do to the budget.
Published by Globes [online], Israel business news - www.globes-online.com - on September 4, 2008
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