The international company has ratified Israel's credit rating at AA - and the rating outlook remains "stable" • The two main limitations of the rating: the relatively high debt burden and geopolitical risks
Minister of Finance Israel Katz
Photography:
Amit Shabi / Paul
The international credit rating company S&P today confirmed Israel's high credit rating at the AA level.
Thus, the high forecast remained stable despite the corona crisis that hit the Israeli economy.
Following the decision, the Minister of Finance, Israel Katz, stated: "This is a great expression of confidence in the economy and a mark of praise for the state.
"Israel is in a good position in relation to many countries in the world that are struggling with the corona crisis, in view of the correct policy we are leading in providing extensive assistance to the various sectors along with maintaining budget frameworks and creating future growth engines."
He promised that the ministry would continue to formulate the 2021 budget alongside advancing a series of various arrangements and reform laws.
Senior Deputy Accountant General Gil Cohen responded: "The confirmation of the ranking at its high level in the midst of a global crisis and a period of continuous uncertainty indicates the strength of the Israeli economy on the eve of the crisis, long-term fiscal commitment and the variety of channels available to finance its activities."
The rating agency's representatives stressed in the announcement the core strengths of Israel's credit rating, such as: a rich and solid economy, strong external accounts and benefits that accrue to the country from flexible monetary policy and a relatively deep pool of local savings.
The two main limitations of the rating remain the relatively high debt burden as well as geopolitical risks.
Estimated: The deficit will increase over 12%
S&P estimates that the economy will shrink in the light of the crisis by an average of 5% in 2020 for the first time in two decades, but will recover by more than 4.5% in 2021.
The company's analysts have noted that the government deficit will increase to more than 12% of GDP and the net government debt ratio will stand at 73% of GDP by 2020.
However, company representatives stressed that unlike many countries in the region, Israel enjoys a very flexible monetary policy, which will allow the Bank of Israel to support government funding needs, while keeping fundraising costs under control.
The Bank of Israel's government bond purchase program (presented earlier this year and expanded in October) may support Israel's additional borrowing needs without significant inflation risks and exchange rates.
The company expects the government to take austerity measures in the second half of 2021.
It was further noted that despite the fiscal challenges created in light of the corona crisis, and the fact that Israel went through three elections without a clear decision in the last 18 months, they expect the government to start efforts to reduce the budget deficit starting in the second half of 2021. According to this scenario, government deficits 4% in 2022-2023, and the public debt will stabilize around 77% of GDP.
In addition, it is written that Israel has excellent access to capital markets, both domestic and international, which supports the government's efforts to diversify its financing options and extend the average debt to maturity.
Although traditionally the government finances its activities in the deep domestic capital market, the announcement also mentions issuances of international bonds for periods of 30 to 100 years.
The ranking action may vary
The company considers the Bank of Israel to be a highly reliable institution, with long experience of full market-based operational independence.
This year, the Bank presented the arsenal of tools available to it to soften the effects of the epidemic on the Israeli economy through interest rate cuts, quantitative easing and low-interest loans to banks and others.
The banking system has a lot of capital, profitability and liquidity.
The company positively noted that they believe that the "Abraham agreements" recently signed between Israel, the United Arab Emirates and Bahrain may contribute to economic, commercial and security cooperation between the three countries.
S&P notes that in the event that fiscal conduct is stronger than their current forecasts or there is a significant improvement in the security environment in the Middle East, a positive rating action is possible.
Alternatively, a negative rating action could occur if the economic slowdown is deeper and longer, leading to a more significant deterioration than expected in fiscal status.
Negative pressure on the rating may arise even if Israel, beyond the immediate effects associated with the epidemic, lacks a medium-term fiscal stabilization program and net government debt continues to exceed the company's expectations.