Could S&P downgrade Israel again?

Minister of Finance Bezalel Smotrich  credit: Noam Moskowitz, Knesset Press Office
Minister of Finance Bezalel Smotrich credit: Noam Moskowitz, Knesset Press Office

Following its unscheduled cut to Israel's credit rating in April, S&P is due to release its routine country review this week. Analysts assess what might happen.

This Friday, May 10, international credit rating agency S&P is due to release a review of the Israeli economy, in accordance with its original timetable. This is despite the fact that the agency issued an unscheduled review in April, downgrading its sovereign rating for Israel from AA- to A+ and the credit outlook from 'stable' to 'negative.'

The credit rating is supposed to reflect risk in the Israeli economy. In the past month, Israel’s risk premium, which has been high since the outbreak of the Swords of Iron war in October 2023, has reached a peak, mainly because of the Iranian attack on Israel on April 13-14, and Israel’s response. The fear on the financial market is that the forthcoming review will include a further rating downgrade, since S&P currently awards Israel a higher rating than does its rival Moody’s, and a much higher rating than implied by the markets themselves. Bank Hapoalim chief markets strategist Modi Shafrir says that the market prices dollar-denominated Israel government bonds at levels similar to those of countries such as Hungary and Romania, which are rated BBB-, four rungs below Israel’s current rating.

There have been cases in the past in which S&P has carried out two downgrades in successive announcements. At the same time, while the Ministry of Finance is monitoring Israel’s risk premium anxiously and is in frequent contact with the rating agencies, ministry officials believe that S&P will avoid any active step on this occasion. They see the security situation as having calmed down somewhat since S&P’s previous decision, certainly vis-à-vis Iran itself, if not its various proxies. The uncertainty in the region, however, and developments in Rafah or on the northern border, could upset that picture by Friday.

Kobby Levi, head of markets strategy at Bank Leumi, explains that whereas the rating agencies determine the rating for each country in a small forum, in accordance with set criteria, the market "looks at things more dynamically and at more diverse factors, in a way that is also impacted by gaps between supply and demand, which are very relevant today. This is one of the reasons that Israel is still rated higher by all the rating agencies than the market’s pricing of the risk spread implies."

Much more expensive debt

Despite the clear negative significance of a rating downgrade, should it happen, or even of a downgrade of the rating outlook, it’s important to realize that the risk to Israel is fairly limited in the short term. A further debt offering overseas, following the successful offering in the first quarter, is not currently on the horizon, although the return required by local financial institutions that lend money to the government has, predictably, risen.

Because of the cost of the war, the amount of money raised monthly by the Ministry of Finance has more than tripled. Since the war started, the Accountant General’s Department has issued local bonds to the tune of NIS 15 billion. In early March, for the first time since the start of the war, Israel raised $8 billion dollar-denominated debt on the international markets. The State of Israel issued three new bonds, with tenors of five years at 5.37% annual interest, ten years at 5.5% annual interest, and 30 years at 5.75% annual interest. The spreads were 135, 145, and 175 basis points respectively over the yields on US government bonds for similar periods.

"No need to raise money overseas"

Ori Greenfeld, chief economist and strategist at Agam Leaders, says, "The bad news is that the market already prices us at a rating well below the various rating agencies. On the other hand, the good news is that at the moment we are not in need of raising money overseas. Demand for local bonds is high, and there is more money in the institutional market every time."

In any event, Greenfeld sees volatility and uncertainty characterizing the local market in the near term. "In the foreign media we saw, for example, that a hostage release deal included ending the war, and the estimate of the likelihood of that contributed to the calming of sentiment on the markets. Now, when the future mainly looks binary, a deal or a conflagration, the uncertainty will be greater."

Published by Globes, Israel business news - - on May 8, 2024.

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

Minister of Finance Bezalel Smotrich  credit: Noam Moskowitz, Knesset Press Office
Minister of Finance Bezalel Smotrich credit: Noam Moskowitz, Knesset Press Office
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