The downgrade by rating agency Moody's of Israel's rating outlook from "Positive" to "Neutral" can be expected to bring in train a similar move by S&P, market analysts said yesterday. We are seeing a worrying trend reversal, after years in which Israel built confidence and esteem on the part of the international rating agencies and was rewarded with substantial rating upgrades. S&P announced a few days ago that it would review its rating for Israel, among other countries, on May 15.
The rating downgrade could have far reaching consequences for the cost to the Israeli government of raising debt on the markets, precisely at a time when the government plans to expand its debt offerings as part of its measures to deal with the damage to the economy from the coronavirus pandemic. The analysts say that the critical remarks from Moody's on Israel relate to the period before the coronavirus crisis and represent a discordant close to Moshe Kahlon's period as minister of finance.
Moody's announced at the end of last week that it was cutting its rating outlook for Israel from "Positive" to "Neutral". This is an exceptional step that has happened only a few times since the rating agencies started to cover Israel's sovereign debt in the 1990s. Moody's raised its rating outlook for Israel to "Positive" in July 2018, and the following month S&P upgraded its Israel rating to an all-time high of AA-. Raising the rating outlook to "Positive" means that the agency is considering making a rating upgrade within eighteen months.
After several review in which Moody's kept its rating outlook unchanged and maintained positive sentiment towards Israel, this time the tone has changed. Moody's points to significant deterioration in Israel's fiscal performance in the past two years, and highlights the fact that the deficit:GDP ratio reached 4% in 2019, whereas it had expected a ratio of 3%. Israel's fiscal policy does not display the robustness required of a country with an Aa- rating, Moody's says sternly.
Against this background it can be presumed that the Israeli government rushed to raise a record $5 billion overseas at the end of last month, knowing that Moody's was liable to downgrade its rating. The consultants to the offering told "Globes" that the decision on the offering was made the previous evening. In the offering, for the first time in its history, Israel issued a 100-year bond, at an annual rate of interest of 4.5%.
The Ministry of Finance did its best to downplay the severity of the action by Moody's and the announcement that accompanied it. The press release issued by the ministry oat about midnight on Saturday night was a whitewash, talking of an "outlook update" instead of a downgrade. In his response, Kahlon chose to ignore the outlook downgrade, and claimed that "the affirmation of Israel's rating by Moody's indicates the great confidence of the global financial system in Israeli government policy."
A very different interpretation emerges from the reactions of market analysts. "The decision by Moody's to downgrade Israel's rating outlook is just the start of a process that will probably end in a downgrade of the rating itself," wrote Psagot chief economist Ori Greenfeld. Sharply criticizing government economic policy, Greenfeld wrote: "The deterioration in the fiscal position and the expected sharp rise in the debt:GDP ratio, alongside the lack of success by the government in implementing measures to support rapid recovery of the economy, particularly the labor market, mean that the forecast cited by Moody's as the reason for downgrading its rating outlook now looks extraordinarily optimistic."
Published by Globes, Israel business news - en.globes.co.il - on April 27, 2020
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