A delegation from Moody's will land in Israel this week to gather information for the international rating agency's latest report on Israel due for publication on October 13. Moody's representatives will conduct a series of meetings with senior officials at the Ministry of Finance and Bank of Israel as well as local economists and market experts.
Of the three major international rating agencies, Moody's has so far taken the strongest line against the government's judicial overhaul. In Moody's most recent ratings announcement for Israel, in April, the agency cut Israel's rating outlook from positive to stable. This was seen at the time as a moderate blow to Israel's economy, although the sovereign credit rating itself remained unchanged. Since then, the US rating agency has ramped up its criticism of the judicial overhaul, in a special announcement published following the approval of the law to curb the Supreme Court's powers by canceling the standard of reasonableness.
If the agency chooses to take further action, Moody's could further reduce Israel's rating outlook to negative. In other words, indicating a tangible risk of cutting the rating itself, within months, when the next rating announcement is published. In an even more harsh scenario, which appears to be less likely, Moody's could skip lowering the outlook and immediately lower the rating itself.
The scenario that Israel is aiming for is a reaffirmation of the existing rating, on the basis of the macroeconomic data, which shows a relatively low debt environment, moderate inflation, positive growth and forecasts for a low fiscal deficit at the end of the year, even if it may be double the government's original goals.
Today Israel's Moody's rating is A1, which is equivalent to the country's +A rating with rival agency Fitch, and one step below Israel's AA- rating with S&P. In all three agencies, Israel's rating outlook is defined as stable. Any negative rating action by Moody's would bring Israel's credit status to its lowest level among the three international rating agencies.
Crisis of confidence with the government
Six weeks ago both Moody's and S&P published special remarks about Israel following the passing of the reasonableness standards law. Moody's wrote, "We believe the wide-ranging nature of the government's proposals could materially weaken the judiciary's independence and disrupt effective checks and balances between the various branches of government, which are important aspects of strong institutions." This is a parameter that is taken into account in deciding on Israel's credit rating.
BDO Israel chief economist Chen Herzog said, "There is great economic importance to this visit by Moody's to Israel, because a crisis of confidence has arisen between the government and the rating agencies."
He explains that the crisis of confidence arose when previously, "The government said it would not take unilateral steps on the judicial issue but in practice it did."
Therefore, according to Herzog, "The importance of the visit lies in the messages they will receive at Moody's from the officials in Israel regarding the government's forward-looking policy. After all, the rating agencies can see the economic indicators from abroad as well, they don't have to come to Israel for that."
Meanwhile, Minister of Finance Bezalel Smotrich has submitted a report on macroeconomic trends in Israel to the Knesset Finance Committee. He noted in the report that inflation "is in a worse state than we expected when the budget was set" and also mentioned the weakening of the shekel, which stands at NIS 3.81/$, while the budget was built based on an assumption of NIS 3.60/$.
However, Smotrich noted that "The Israeli economy's macroeconomic data are good and strong." He also wrote that "mighty forces with huge budgets and unprecedented media backing are defaming Israel as bad in the economic world with lies and false intimidation."
Published by Globes, Israel business news - en.globes.co.il - on September 5, 2023.
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