Next week two major international bodies will publish critical reports about Israel. The first is by the World Bank, which will publish its annual report about Israel. The second and more important is international ratings agency S&P, which will publish its latest credit rating and credit outlook about Israel, just two weeks after Moody's cut Israel's credit outlook from positive to stable.
This will complete the latest reports by the trio of major international ratings agencies after Fitch reaffirmed Israel's A+ rating and stable outlook at the start of March, although it warned on the judicial reform.
S&P's imminent credit rating is generating major interest in the market and many are wondering whether S&P will follow Moody's lead and cut Israel's credit outlook, or leave it unchanged.
Israel's credit rating, according to S&P is currently AA-, which is an especially high rating, and even higher than Moody's. The significance of a cut would be a move to a negative status with Israel's current outlook positive.
The market remains optimistic
At this stage the market does not know how S&P will act and what it will include in the report that it publishes. However, a senior official in Israel's banking system has told "Globes" that the prevailing assessment in the market is that, as in the case of Moody's, the global rating agency will not lower Israel's credit rating, but there is a reasonable chance that the outlook will be cut. "As far as we know, the agency places a lot of emphasis on the balance of payments and direct investments, which throughout 2022 had very strong data in Israel, so it can be assumed that its rating has not fallen."
On the other hand, the same source explains, "The rating agency has raised concerns about the government's actions and the judicial overhaul and even though they have not issued an official warning, as Moody's has done, that does not mean that they do not see the harm to institutions that is taking place here as an element that damages Israel."
The Finance Ministry is holding discussions ahead of the decision
Ahead of S&P's decision at the end of next week, senior Ministry of Finance officials have held discussions on the issue. Some have expressed concern that the agency would take more drastic measures against Israel than Moody's. Moody's mentioned that the main reason for lowering the outlook was the planned change in the judicial system, but at the same time the agency noted positively the restrained budget set to pass in Israel. But since then the budget has undergone several changes.
The Ministry of Finance told "Globes" that talks are held with the rating agencies on an ongoing basis throughout the year. "The ministry is doing what it can to improve Israel's credit rating. However, until the rating itself is published, we don't know what the rating company will decide, and we will respond to that at the appropriate time."
On the same level as the strong countries
Israel's credit outlook with S&P has remained on stable for the past five years, and puts Israel on the same level as the world's strongest countries like Ireland, the Czech republic and Slovenia. In this way Israel has managed over the years to raise debt at relatively low interest rates and it has been fertile ground for low risk investments.
On the most recent occasion that S&P published Israel's credit rating in November 2022, the agency stated positively that "Israel's fiscal policy has strengthened and there is an expectation of a balanced budget for 2023." On the negative side, the rating agency noted geopolitical factors: "Despite the Abraham Accords and the signing of the maritime border agreement with Lebanon, an escalation of hostilities with organizations surrounding Israel is certainly a real possibility."
Israel's macroeconomic data are also taken into account
In recent months, S&P has expressed concern about the changes that the government is promoting in the judicial system. The chief analyst responsible for Israel's rating, Maxim Rybnikov, has remarked about this in several interviews, and said, among other things, "S&P is looking closely at the actions of Prime Minister Benjamin Netanyahu and his government, how it will operate in the West Bank and everything about promoting the judicial reform." According to him, the ostensible changes in the judicial system may already pose a risk to Israel's credit rating.
At the same time Rybnikov points out that Israel's economy is strong and stable and ended 2022 with a fiscal surplus for the first time in 35 years. "We are not especially concerned about the budget at the moment, despite declarations by coalition members on the need for higher expenditure."
These sentiments were echoed last month by Bank of Israel Governor Prof. Amir Yaron. He said, "There is importance to responsible fiscal management, particularly at this time. Indeed, the government approved a budget proposal whose framework is adequate for the restrictive monetary policy during this period. The wage agreements in the public sector, which were signed recently, have also reduced uncertainty in this area and are consistent with curbing inflation and returning it to the target range."
This is not the end of Israel's economic troubles
However, since then mistakes have been made, increasing the chances of a widening deficit due to expected lower tax revenues. One scenario is that the government will not be able to meet the deficit target it has set for itself (as a percentage), and will probably reach a deficit of 3%, at the very least. At the same time, the Accountant General Division of the Ministry of Finance is already preparing to increase the state's debt raising to deal with this expected drop in revenues.
Israel's economic troubles are far from over. Credit rating agencies attach great importance to monetary conduct. In recent months, Israel has been struggling with rising inflation, like many other countries in the world. Inflation in Israel currently stands at 5%, and the Bank of Israel interest rate stands at 4.5%. Inflation also affects other macro data. For example, Israel's GDP is expected to shrink and the Bank of Israel has already lowered Israel's growth forecast from 2.8% to 2.5% in its latest forecast.
Published by Globes, Israel business news - en.globes.co.il - on May 3, 2023.
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