Fitch is telling us it won't get better

Avi Temkin

A growing deficit, uncertain budget, economic slowdown and unclear security situation caused Fitch to downgrade Israel's outlook.

Israel is not the first country and won't be the last to be given a less optimistic outlook for its sovereign long-term foreign currency issuer default rating. In fact, there were many other countries that have had their rating downgraded, and even more that had their outlook rating lowered than countries that were upgraded.

This fact should be taken into account, so as to put into proportion the significance of Fitch's downgrading of the rating of Israel's outlook - and not the rating itself - from Positive to Stable. In other words, the rating agency is saying that in the near future the rating of the long term Israel government debt won't rise but also won't fall.

Although the government bond market responded today with falls, it is important to remember that the rating, and the rating outlook, deal with just one issue: what is the likelihood that the government will be able to repay its debt and the interest on it. The fact is that Fitch's representatives that visited Israel before publishing the outlook, gained the impression that there are reasons to downgrade the outlook in order to reflect what they found here: a rise in the government deficit, growth of only 2.3% and rising geopolitical risks.

Taking all this into account, Fitch's representatives believe that the near future will not hold any improvement in the Israeli government's ability to repay its debt but a worsening. Considered in the correct perspective, Fitch's announcement is not important, and only confirms what those criticizing Israeli government economic policy have been saying for a long time. The government is not really bothered by Fitch's announcement, and from its point of view has no reason to be so. After all "Stable" is what the current government is striving for more than anything else in all areas of endeavor.

This government loathes change, is deterred from moving out of its comfort zone, and if it was up to it, everything would be frozen in place. In the economic sector, this is seen most fully in fiscal policy. The budget has become a document for "first of all zero VAT - and then the rest." There are no initiatives to cope with fundamental problems such as poverty, low productivity, or an alarming distribution of wealth. The government is not especially moved by the fact that the Israeli economy is mired in low growth, and sees the situation as sort of "routine." Even the breakdown in communications between the Minister of Finance and The Ministry of Finance officials is seen as normal, not to mention the importance Yair Lapid gives to the warnings of Bank of Israel Governor Dr. Karnit Flug.

So in this reality, with the public's faith in the government eroding daily and with the business sector feeling abandoned, and the Bank of Israel left alone in the struggle against the slowdown Fitch decided to point out that all this will have repercussions. That certainly won't shock anyone in the government.

In fact nobody in Israel has any idea what will ultimately be in the budget and what will happen in several months' time and if the deficit will be larger than expected. Nobody knows if the geopolitical or security situation will worsen, and whether the boycott on Israeli businesses abroad will gather pace. Fitch knows how to tell us that it won't get better.

Published by Globes [online], Israel business news - - on November 23, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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