"We expect the domestic political environment will continue to be highly polarised, exacerbated by the ongoing trial of Prime Minister Benjamin Netanyahu, who has been indicted in three corruption cases on suspicion of accepting bribes, fraud and breach of trust," is how international rating agency Moody's describes the political paralysis in Israel, resulting in the failure to pass the state budget and the real possibility that in this coming March, Israel will hold its fourth parliamentary election in two years.
In a 31-page document released at the end of last week, Moody's sets out the reasons for its decision to maintain Israel's sovereign rating at A1. The rating has been unchanged since 2008. Alongside appreciation of Israel's economic strengths, especially in its technology sector, a forecast of rapid economic recovery in 2021, and high marks for the economy's robustness in the face of external crises, Moody's reveals that it has downgraded Israel's score for "institutions and governance strength". "We have witnessed a deterioration in fiscal policy effectiveness in recent years, driven in part by a more polarised political environment," the agency's report states. It also notes that "Politicians have increasingly sought to challenge the country’s judicial system which may, over time, reduce the effectiveness of the courts to act as a check on the exercise of government power. At the same time, public confidence in the country’s politicians has been eroding as Israeli leaders have been at the centre of a number of scandals involving bribery and abuse of power."
Minister of Finance Israel Katz said in response to the publication of the report, "The company believes in the strength of the Israeli economy and in its ability to recover rapidly from the crisis. In addition, Israel's macroeconomic policy and the aid given by the state to its citizens are given positive mention. I shall continue to assist business owners, the self-employed, and salaried workers and provide them with solutions in this period, and at the same time I will promote approval of the 2021 state budget, alongside a series of laws on economic arrangements and reforms that will benefit Israel's economy and citizens."
Israel's economic strengths almost unharmed
To an onlooker, it sometimes seems as though we are talking about two different countries. On the one hand, there are the reports in Israel of a deepening economic crisis, high unemployment and hard-hit industries, and soaring public debt, with political paralysis and no state budget. On the other hand, the shekel is at peak strength, and the credit agencies continue to give Israel high ratings, enabling it to keep raising debt overseas at near-zero interest rates.
The report from Moody's goes some way to resolving the apparent contradiction. The short answer is that, with all the difficulties, Israel's economic position is still relatively good in comparison with most of the developed countries, especially those with credit ratings similar to that of Israel. Not only that, but in comparison with Israel's position on the eve of the previous global crisis in 2008, Moody's finds substantial improvement in several important criteria. Israel's economic strengths, chiefly its technology sector and its balance of payments, have been almost unharmed during the current crisis, and its weaknesses do not carry decisive weight in the credit rating. From a perusal of the Moody's document it can be cautiously concluded that even another election campaign will not substantially change the agency's view, and will have no serious effect on Israel's credit rating.
There are, however, reservations. Israel's credit rating from Moody's is one level below its rating from Standard & Poor's (S&P). In the past, Moody's was under pressure to raise its rating to bring it in line with that of S&P. Since the outbreak of the coronavirus crisis, however, Moody's has gone back on its intention of raising the rating, in what could indicate a change of trend. At any rate, cutting Israel's rating at this time would open up a gap of two levels versus S&P, and Moody's presumably will exercise extra caution before taking such a step.
A sovereign credit rating is meant to answer one simple question: What is the likelihood that a country will not repay its debts when they become due? To answer that question, the credit rating agencies have built complex methodologies to assess the ability and will of a country to repay its debts under various headings: economic strength, quality of government institutions, debt management policy, and the ability of the economy to withstand external shocks.
Of the four main criteria making up the rating, Israel is awarded a higher score for economic growth than its overall rating. It receives the same score as its overall rating for quality of government, and a score lower than its overall rating for level of debt and the various risks, among them political risk. Nevertheless, despite the low score, the level of political risk in Israel is not rated worse than the median score for countries with similar overall ratings, in Moody's system.
It is stressed that, even after the filing of an indictment, Prime Minister Benjamin Netanyahu denies the charges against him, has not been convicted of any crime, and is entitled to the presumption of innocence.
Published by Globes, Israel business news - en.globes.co.il - on December 6, 2020
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