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The existential fear also leads our economic thoughts towards the black conversion - even when the latter is white, as is the market's reaction to the examination of Israel's credit rating.
Israel's government bonds are priced as a certain downgrade in the country's credit rating, even though Israel's economic data continues to be stable - and will continue even after the expected deficit.
Israel's debt-to-GDP ratio stood at 58% until the end of the third quarter of 2023, and this against an average ratio The debt-to-product ratio of the G7 countries, for example, was 128% for that period.
The debt-to-product ratio shows whether the country has enough assets to enable the ability to pay back its debts, and in Israel's current debt-to-product ratio it is evident that it will easily succeed in paying back its debts, even After the planned increase in the deficit, and this compared to much stronger economies, whose liabilities exceed their assets.
The strength of the economy today is highlighted by the dismal state of the high-tech industry / Austin Distel on the Unsplash portal
The Bank of Israel announced in the middle of last December that as of the end of the third quarter of 2023, Israel has a surplus of $220.3 billion in its assets over its obligations in debt instruments, and in the chart prepared on the world government bonds website, which centers the bond data of the various governments from the International Monetary Fund, it can be seen that Israel's debt-to-GDP ratio is one of the lowest in the world.
So why is the market already pricing the Israeli government bonds as if their rating had already been downgraded?
And in light of this, is there going to be any kind of impact on our day-to-day lives, given that the rating will indeed go down?
Zur Ilan, CEO of Almanda Capital Hedge Funds and head of the research system at Tuval Investment House
, explains: "The debt-to-GDP ratio as of the end of January 2024 was already at 61%, and due to security expenses and the economic damage, the deficit this year is expected to grow to levels of 5-7% , which would still leave Israel's debt-to-GDP ratio below 70%.
"The meaning is indeed that the economy of the State of Israel still shows strength and a high ability to repay its debts - much more than most developed countries, even after the increase in the expected deficit. The claim for harm is, among other things, the increase in Israel's debt collection, but as can be seen in the data, it will not significantly harm the economic strength "
In
addition, it should be remembered that the strength of the economy today is emphasized by the dismal state of the high-tech industry, which was a major economic engine until 2022, and has been at its own low since then.
That is, the current economic figures are after deducting the high-tech contribution at its peak.
When this industry returns to growth it will contribute its share back to the economy, and with it the Israeli defense industries will also continue to support the economy through exports.
"In addition, the excess of assets over liabilities as presented by the Bank of Israel shows that Israel is a lender country and not a borrower country, which helps to maintain the strength of the shekel relatively, certainly compared to the past.
"The ratio of the dollar to the shekel today is where its contribution to the economy is positive More than his contribution to the increase in inflation, thus also supporting Israel's economic strength.
It is also evident that the foreign investors still believe in the strength of the shekel."
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Tzur Ilan, CEO of Almanda Capital Hedge Funds and Director of the Research Unit at Tuval Investment House/courtesy of the photographers
So why is the market pre-pricing Israel's credit rating downgrade?
Because "besides all this, we are in a time of war with an interest rate environment that is still high, so the sensitivity to shocks is greater and, like the whole country, the market is also in negative feelings.
"But it is mainly about feelings and less about data that indicates a violation of stability.
Thus, for example, consumer spending returned to its pre-war position.
"This sense of inferiority has led the markets to price a decrease in Israel's credit rating since the beginning of the fighting and before the rating was even damaged, and in my estimation the pricing has fallen excessively. Since Israel's government bonds are trading below Israel's current rating group, and the risk premium, as reflected in the CDS (Credit Default Swap - the exchange contract for credit risks), has risen strongly since October.
"In my opinion, there is no place for this feeling of being disadvantaged in the economic aspect, since during the second half of the year another interest rate reduction is expected both in Israel and in the world, which will make it easier for businesses and consumers and will also bring optimism to markets and an increase in economic activity.
"Therefore, in my estimation, as long as these data are preserved, a downgrade is not expected at all, and it must be remembered that the horizon of Israel's credit rating is also negative.
"In addition, if a war develops in the north that drags Israel into a regional war that increases the uncertainty in the markets, a downgrade is likely Israel's credit will increase.
Because this situation will further increase the security expenses and the additional indirect expenses required for Israel in favor of the war, and deepen the state's deficit.
"In addition, it must be remembered that a significant increase in defense spending will come at the expense of other important sectors, thus harming the growth and functioning of the economy, and the standard of living of Israelis for years to come."
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