Although he took up his post at the Ministry of Finance only two and a half years ago, Accountant General Yali Rothenberg has had to deal several upheavals. He has worked under three ministers of finance in three different governments, two permanent directors general of the ministry and another two temporary ones. In addition, he has had to deal with a large deficit resulting from the Covid-19 period, a global market slide, and work on a national budget despite an unprecedented internal dispute over judicial reform and disbursement of coalition budget funds. In an exclusive interview with "Globes", Rothenberg looks back and summarizes the first half of his tenure, and talks about future plans.
The night of the report: "Refresh… refresh… and relief"
Last week, S&P Global Ratings published its semi-annual report on Israel, and tension ran high after Moody's decided, a month earlier, to lower its rating outlook for Israel. "The night of the announcement is a night you find yourself refreshing your browser over and over. When you see the message go up, you have a sense of relief," says Rothenberg.
Are you satisfied with the result?
"Yes, maintaining the outlook and the rating is a good result. The financing division in the Accountant General Department, and even I personally, were in constant contact with all the analysts at the rating companies. They can meet and hear from anyone they see fit to ask. They are also exposed to the media, and the reviews of financial institutions that cover Israel, and their process is very professional. We know approximately what can and can't happen with each rating company. But it's always tense the night before."
Why did Moody's decide to downgrade its outlook?
"Moody 's lowered Israel's rating outlook in April 2020 from 'positive' to 'stable'. About a year and a half later I met with them in New York and told them that in view of the spectacular recovery of the Israeli economy from Covid, it was time to reconsider their decision and indeed, in April 2022, they upgraded the outlook again".
Rothenberg admits that a major consideration the rating agency faced when making its current decision was the judicial reform promoted by the government. "You also have to look at the gap, both in their perception of the reform, and what happened in the interval between the two decisions. Promotion of the reform in the Knesset Constitution, Law and Justice Committee was halted, and negotiations started at the President's residence. Therefore, S&P took the possibility of a resolution as their basic assumption. "
"The most important thing right now is to regain certainty"
Although the rating outlook was not downgraded, the S&P report still contained some warnings. The growth forecast for the current year, for example, was cut to 1.5%, reflecting negative real per capita growth. Rothenberg is not alarmed and provides a somewhat surprising explanation. "I will explain how I read reports from rating agencies, perhaps in contrast to other forecasts. The Bank of Israel's growth forecast stands at 2.5%, and the International Monetary Fund (IMF) is also aligned with that. The chief economist at the Ministry of Finance has now updated her forecast to 2.7%. That is the forecast environment.
"Back in November 2022, S&P came out with a forecast of 2% and now they have revised it to 1.5%. When the rating agency says that it assumes 1.5% as its baseline scenario, to me, as the person responsible for the rating, that is a safety net . I'm fine even with 1.5% growth, because this is actually their baseline."
What is your most optimistic scenario for the judicial reform?
"I think it’s necessary to consider what all the rating agency and the IMF are saying, and put it on the table. The nation is divided, I see what I being said, and as a citizen it bothers me. The most important thing, as S&P, Moody's, Fitch, and the IMF wrote, is, essentially, to regain certainty. I think I was the first to say, at one of the conferences, that the goal is to reach a broad consensus as quickly as possible. And that broad consensus should return the economy to certainty. There is a process taking place, overseen by the president, and I am optimistic about it."
"Approach the ultra-Orthodox from a respectful and non- patronizing place "
The interview with Yali Rothenberg was conducted during the last phase of passing the budget. This is only his second budget while in his post, due to the political instability, and it seems that this time things are particularly stormy, despite the current budget including far fewer reforms than the one before it.
What stands out, especially this time, is the exceptional size of coalition budget funds, which are estimated at over NIS 13 billion. Senior Ministry of Finance officials, including Commissioner of Budgets Yogev Gardos, Legal Advisor Asi Messing, and Chief Economist Shira Greenberg, even issued an extraordinary warning against the government’s maneuver.
Senior ministry officials have issued opinions that were out of the ordinary. What do you think about the coalition funds?
"As accountant general, I support anything that encourages growth, and is good for the economy and the market. Therefore, I am less supportive of anything that does not encourage growth. I’m not convinced that the marginal shekel is what needs to be spent. Part of the accountant general's job is to make sure that the money the State of Israel takes in goes out and reaches its destination and its purpose."
Regarding the ultra-Orthodox community in particular, Rothenberg says that "Employment of haredim is the economy’s most important potential. 50% of ultra-Orthodox men work, and as more enter the job market, then we will basically see more growth, and I view this aspect as a potential.
"At the same time, it’s important for us to come from a place that’s culturally respectful, not patronizing and acting using power alone. You have to think about the right ways to do this. You cannot look at the ultra-Orthodox world as one block, it’s layered, and you have to understand that there is a fairly large group which does participate in the job market, and we need to work together to increase that."
In the previous budget, there were reforms to support growth: raising the retirement age for women, for example. There was a feeling that you took out all the plans that had been lying in the drawers here for years and you had support to implement everything. What elements of the current budget support growth?
"Honestly, this is a question that should be asked in two weeks, after all the dust has settled, and it is also appropriate to ask the minister of finance and the head of the Budgets Division. From my perspective, the main positive thing I see is the National Infrastructures Law. There are some very significant tools in there to sharpen the axe against regulation.
"In the infrastructure sector, we often see many different authorities at the table, each of which may be right in its own way, but things don’t move forward. That’s why there needs to be a lead entity to say, 'This is important. Now we’re making it a high priority.' This is one of the significant achievements of this budget. It’s a lesson we learned from the Metro project in the previous budget."
The ‘sharpening the axe’ metaphor was used repeatedly during the conversation. "My criticism is that our axe as government ministries is not sharp enough. Meaning, metaphorically, that for every 40 minutes of axe-sharpening, I have 20 minutes of tree-cutting time. We need to work on deregulation and this is part of the confidence that the economy needs to regain as well. The Israel Land Authority can’t go around torturing entrepreneurs and government ministries, and doing as it pleases, just because it can. This has to be resolved. "
"I don't foresee a dramatic increase in the deficit in 2023"
The original revenue forecast issued by the Ministry of Finance’s chief economist, on which the state budget is based, predicted a deficit of 0.8%-0.9% of GDP. Following the decrease in tax revenues, especially in the high-tech and real estate sectors, it is very likely that the government will find it difficult to meet this target, and will be forced to choose between alternatives such as raising additional debt and increasing the deficit, or cutting spending. S&P, for example, predicted that the deficit would reach 2.5% this year. Accountant General Rothenberg sounds less concerned.
He is very proud of having completed a green bond issue in the international markets early this year that was considered very successful. "We raised an amount that very few succeed in closing, with over three hundred foreign investors participating. It’s the sort of international issue that’s done maybe once a year. On the local market, we issue weekly, and we see no need at present to deviate from this policy. I don’t currently see a need to raise more, nor do I currently see a dramatic increase in the 2023 deficit as has been reported everywhere."
The markets are predicting a deficit of 3% or more by the end of the year. Are they wrong?
"I already have data for four full months. I see the revenue picture. We’re also currently in all the internal discussions and we don’t see this high deficit in view. From our standpoint, it doesn’t make a big difference if the deficit is 0.8%, 1.1%, 1.2 or 1.3%. A difference of 0.1% at the national level is another NIS 1.7 billion.
"Having given this a great deal of thought, we don’t foresee this high deficit scenario as a realistic one, even though it may have a certain probability. There are those in the market who do foresee it and expect a dramatic drop on the revenue side. It could be that there’s a 'time lag' here. The labor market is tight, with minimal unemployment - 3.1%.
"Economic research shows that it usually takes about three quarters for the interest rate to affect the labor market. So, the fact that it’s tight right now doesn’t mean that companies aren’t starting to think, become more efficient, and cut costs. The capital market is alert to these things and usually reacts first. Bottom line, there is a time lag, but on the other hand we also should remember that we have a very, very strong economy."
Published by Globes, Israel business news - en.globes.co.il - on May 21, 2023.
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