BoI governor: Israel's actual rating is BBB

Governor of the Bank of Israel Amir Yaron  credit: Yonatan Bloom
Governor of the Bank of Israel Amir Yaron credit: Yonatan Bloom

Amir Yaron says the market is pricing Israeli government debt higher regardless of the credit agencies, and warns of a 16% rise in direct taxes unless haredim participate fully in the workforce.

Governor of the Bank of Israel Amir Yaron says that, despite the high interest rates that Israel is paying on bonds issued by the Ministry of Finance, the Israeli economy is capable of absorbing the high costs. "There’s no getting away from it, when debt rises, the price rises as well, that’s in the nature of things. At the same time, if you’re asking about the capacity of the financial institutions and their ability to absorb the debt, our analyses show that the answer is that they certainly can," Yaron said in response to a question from "Globes" at a press conference he held marking the release of the bank’s 2023 financial statements.

"The Accountant General has raised debt overseas. On the one hand, demand was high, which is good, and on the other hand this apparently reflects the premium we’re talking about. It’s part of the price that arises from the addition to the defense budget," Yaron said.

The Bank of Israel’s financials show that, in the corporate sector, at times of crisis, the banks are practically alone in extending loans, with the other financial institutions taking a step bank. At the press conference, the director of the bank’s Research Department spoke of the challenges faced by poor households. Nevertheless, the talk among the regulators is often about matters pertaining to those who have money, such as interest rates on deposits, or on current accounts in credit rather than on those in overdraft, with the Competition Authority seeking to declare the banks a concentration group in deposits.

What do you have to say to the millions who are in need? And what is your stance towards the steps that the Competition Authority plans to take concerning the banks?

"In the past few months we have seen credit to large businesses stabilizing, and we have seen moderation in credit and in credit balances for small businesses. We therefore came in with our plan, which added NIS 6 billion in this area. There is also the addition of the Accountant General’s plan. Not long ago, we extended, for the third time, the payment deferral plan in order to lighten the burden. The hope is that the switch to individual aid will enable both businesses and households to get though this period, insofar as the economy is indeed recovering, and bring households to the next stage in better shape.

"As far as the Competition Authority in concerned, we of course are having, and have had, conversations with it. It points to a number of measures focusing on deposits, most of which have been implemented or are in the process of being implemented by the Supervisor of Banks, and we will review the matter in due course."

In its annual report, the Bank of Israel comments on the State of Israel’s risk premium, and says that, in practice, Israel's rating is BBB, even if the rating agencies have not downgraded it to that level. In February,  Moody's cut Israel's credit rating from A1 to A2. 

You say that the State of Israel is priced at a credit rating of BBB. Will we soon be there in the agencies’ ratings?

"Our CDS, although it has improved since the start of the war, is still at high levels. But what counts as far as government bonds are concerned is the market price. We don’t know what the other two rating agencies will do, but what I say is that the downgrade by Moody’s was not a market event, because we were already priced higher. Israel has a history of emerging well from crises, but one price of a rating downgrade is that, the more the formal rating is damaged, the longer it will take to return to a high rating. That is to say, even though we return to economic growth, this is liable to remain and to exact higher prices from us than we could have been paying."

Will the high tax burden affect economic growth and personal welfare, and will it be shared fairly?

"Given the timetable for the budget and the ability to collect tax, there was a preference for raising the VAT rate, since VAT has a permanent character and the step can be taken quickly. It’s also not the most regressive tax there is. But it could be that for the 2025 budget it will be necessary to reexamine taxation."

Mortgage interest and demographic trends

Will the fact that you raised the fixed-rate component of mortgages not harm people as interest rates fall?

"When we were on the other side, and interest rates were rising, people complained about the variable rate component (just before interest rate started to rise, the Bank of Israel raised the limit on the variable rate component of mortgage loans to two thirds, R. W.). And so, when we raised the interest rate, everyone sustained the higher cost of variable interest rate loans. So now there’s a larger slice than there was, and as inflation and interest rates decline, those same people will benefit."

In reviewing the annual report, Yaron commented on demographic forecasts for Israel. According to the Bank of Israel’s forecasts, while the Arab population will remain much the same as a proportion of the total population of the country, rising from 19% in 2015 to 22% in 2065, the proportion of the haredi (ultra-Orthodox Jewish) population will grow substantially. According to the forecasts, it will rise from 7% in 2015 to 26% in 2065, while the non-haredi Jewish population will shrink from 74% of the total a decade ago to 52% in twenty years’ time.

"Integration of the haredi population into the labor market is important," Yaron said. "We did a calculation according to two scenarios. In the first, we continue as we are today, and in the second haredi men converge on the rate of employment in the rest of society. The difference between the two scenarios reaches 6% of GDP per capita in 2065.

"It’s important to realize that the demographic clock is almost deterministic, and so it’s very important to take action in this area. It brings us to a level slightly below that of Poland in GDP per capita. That’s a lot. If the processes continue as they are today, and there is no convergence and people don’t go out to work, and the government continues its rate of expenditure on that community, we will have to raise direct taxes by 16%."

Yaron said that as far as participation in the workforce was concerned, it was important to enter the market with skills so that pay would be high, and that that meant core curriculum studies. "Another issue that the war has sharpened is that the army needs more manpower. To the extent that reserve duty falls on those who already serve, that will raise the cost to the economy by NIS 8-11 billion annually. That’s not a negligible amount, not to mention the normative aspect of equal sharing of the burden. The needs of the army have brought out the purely economic issue, and the more that the increase in the burden of army service is shared by more people, the less will be the economic damage," Yaron said.

Published by Globes, Israel business news - - on April 1, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Governor of the Bank of Israel Amir Yaron  credit: Yonatan Bloom
Governor of the Bank of Israel Amir Yaron credit: Yonatan Bloom
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