On Friday, international rating agency Moody’s downgraded its sovereign rating for the State of Israel from A1 to A2. Moody’s also downgraded Israel’s rating outlook to "Negative", indicating that there may be further downgrades to come. This is the first time Israel’s credit rating has ever been cut.
To understand the significance of the decision by Moody’s, we spoke to Yarom Ariav, who was director general of the Ministry of Finance from 2007 to 2009.
What in your view will be the immediate consequences that we will feel as a result of the rating agency’s decision?
Ariav: "First of all, it makes the debt and the interest we have to pay more expensive. That will come at the expense of services that are important to every citizen. Secondly, it of course signals that the risk of investment in Israel has risen. This mainly applies to foreign investors, who will think twice about investing here. That is of course not good for inward investment in high-tech and industry."
Ariav then turned to the reasons for the rating downgrade. "Even as a country in a militarily and politically problematic region, Israel has traditionally been able to recover very quickly after extraordinary events such as wars," he said. "The fact that Moody’s nevertheless downgraded the rating shows that they have doubts about the ability of the economy to get back onto a growth track. We are now at the height of the war, but even beforehand we were already not on a good path because of the judicial overhaul. That is to say, this is a cumulative event.
"I think that this is a certificate of inadequacy for the economic leadership in the State of Israel. Clearly, the circumstances are difficult, but this is a professional casting of doubt by a rating agency on the ability of the country’s economic leadership to steer the economy in these times."
What economic problems influenced the decision by Moody’s?
"I think that several things have happened that are not good. First of all, the most recent budget showed that those guiding the Israeli economy did not understand the seriousness of the situation, the gravity of the hour. They approved too high a deficit, while, in the make-up of the budget, still giving very large allocations to sectoral interests."
Ariav believes that it was not only the content of the budget that was problematic in the eyes of the rating agency, but also the budget process. "In my view, the fact that everything drags on until the last moment, and there are constant delays and uncertainties, diminishes the confidence of the rating agencies in the ability of the leadership here to steer the ship.
"The talk of a permanent increase in the defense budget also damages the rating agencies’ confidence. Of course, the current state of military preparedness took a severe blow, and it has to be reassessed, and the budgetary needs must be derived from that. But the event that we had on October 7 was certainly not one in which the defense budget caused a failure to meet goals. It was an intelligence and deployment problem, but it’s not clear that a higher budget would have prevented it. So to say automatically that we have to increase the defense budget is very problematic. I’m not talking about replenishing stocks of military equipment, I’m talking about something permanent. If that happens, civilian services will be harmed, and that will also harm the strength of the Israeli economy. All these things combined caused Moody’s to cut the rating and also to give a negative outlook."
Since the decision by Moody’s was published, government supporters have been claiming that the decision is political and not based on economic data. What’s your view of that claim?
"Over the years, I have met many of the senior people in these rating agencies, both in my roles at the Ministry of Finance and afterwards, and I can tell you that these are people with very professional work methods. They are people of whom I can unreservedly say that they analyze matters very coldly and objectively."
What is your opinion of Minister of Finance Bezalel Smotrich saying in his official response to the decision by Moody’s that it’s political and so forth?
"This was not an appropriate response on the factual level, but also because it’s very much in our interests to be smart. After all, we’ll need these rating agencies in the future as well, so why quarrel with them?"
Do you think that other agencies will follow suit and downgrade their ratings?
"Each of the rating agencies has its own work methods, but they all have the same data on the Israeli economy. So there’s a basis for the fear that the rating will be cut at the other agencies too, but it hasn’t happened until it happens."
If we want to try to persuade them to restore the rating in their next rating decision to where it was, are there things that the government can do?
"I think that a great deal of the story lies in the conduct of the economic leadership in Israel. As soon as the economic leadership does things that are not clearly done out of professional considerations but perhaps rather out of considerations of political survival, then the rating agencies take a negative view from the outset. As soon as the leadership shows that it understands the severity of the situation and takes the right steps and acts courageously, then there’s a chance that we will see a change for the better. Another possibility that could cause a change is a substantial improvement in the geopolitical situation, but it is not advisable to rely on that."
When you talk about the State of Israel’s economic leadership, what do you mean? The prime minister and the minister of finance?
"Mainly, yes."
Do you have the sense that the professionals at the Ministry of Finance manage to influence government policy at all, or do the politicians hardly listen to them?
"Clearly, many decisions are made contrary to the professional level. I know, for example, that very many of the decisions in the latest budget were contrary to the very clear recommendations of the professionals there. They simply didn’t listen to them.
"If preserving the coalition is the main thing at the moment and that is what dictates the tone on both the economic and the security levels, the rating agencies will certainly see that. The rating is made up of external circumstances, such as the geopolitical situation, obviously the war now going on - these are very important considerations in weighing up the rating. But it is also measured by the question whether whoever is in charge of the Israeli economy makes the right decisions. As soon as they see that decisions lean towards political considerations and are not necessarily the right professional decisions, that undermines confidence in the ability to get the Israeli economy back on track and deal with the crisis properly."
Published by Globes, Israel business news - en.globes.co.il - on February 11, 2024.
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