With S&P's backing, Kahlon can ignore the critics

Amiram Barkat

The bad news of recent months failed to dent S&P's confidence in the Israeli economy and in the government's ability to repay its debts.

Moshe Kahlon can smile: the survey of the Israeli economy released by S&P at the weekend is an excellent end of term certificate as far as the minister of finance is concerned, and, more importantly, it gives him the backing he needs to cock a snook at the "financial commentators" and everyone else who criticizes his economic policy.

The lowering of the growth forecast, the large excess deficit expected in 2019, political instability with elections (not to mention possible indictment of the prime minister) approaching, growing tensions on both the northern and southern borders - none of the bad news of the past few months fractured S&P's confidence in the strength of the Israeli economy and in the ability of the Israeli government to repay its debts. None of the bad news aroused any perceptible doubt on S&P's part as it decided to affirm Israel's high credit rating, with a "stable" outlook. This positive sentiment swept aside landmines that in other circumstances could have caused real damage to Israel's rating. In acknowledging that 2019 could end with a fiscal deficit amounting to 3.3% of GDP and a rising debt:GDP ratio, S&P has given the green light to government spending - and we can rely on our politicians that they will exploit this generous gesture to the full, and will go into overdraft.

The admiration of S&P's analysts for the performance of the Israeli economy is manifest throughout the eleven pages of economic review attached to the announcement that the agency is confirming its August upgrade of Israel's long-term rating from A+ to AA-. Economic activity is diverse, the labor market is stronger than ever, growth is robust, and Israel continues to be a net lender of money to the world, that is, it maintains a positive balance of payments. Against this background, the negative events disappear. Even the change in the long-term trend, from a fall to a rise in the debt:GDP ratio, failed to perturb S&P, whose analysts predict that the next government will preserve the existing low ratio and even restore the declining trend. Not many Israeli economists would be prepared to endorse such an optimistic forecast.

We should not overlook the fact that it was only six months ago that S&P raised Israel's rating to AA-, putting it into the very respectable club of double-A countries. We should not overlook the fact that this rating upgrade followed years of close monitoring, deliberation and analysis. The idea that S&P would revise its carefully constructed conceptions just because of an event such as a budget blow-out was naive from the start. Clearly it will take much greater upsets than those that have occurred in the past few months to make S&P's management tell its branches to recalculate. It will be much more interesting to see how S&P's rival Moody's, which announced an upgrade to Israel's rating outlook, behaves. Moody's can still change its mind, without its image suffering.

Published by Globes, Israel business news - en.globes.co.il - on February 4, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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