Despite the concern that the uncertainty surrounding the legal reform will lead the S&P credit rating agency to make a decision similar to Moody's, the country's citizens can breathe a sigh of relief – the company last night approved Israel's rating forecast at AA with a stable forecast. The baseline scenario on which S&P is building is to reach a compromise on legal reform.
Despite the optimism about dialogue, the company estimates that growth will be only 1.5% this year. We asked several senior economists to comment on the announcement of the international rating agency and give their brief commentary.
Minister of Finance Bezalel Smotrich, Photo: Oren Ben Hakon
"Incitement, slander and incessant babble"
"There has never been a real risk to Israel's credit rating, and anyone who said otherwise should simply be ashamed," Prof. Yaron Zelicha told Israel Hayom. "S&P's announcement puts an end to the economic incitement campaign they have carried out here in recent months. Not only is there no credit rating downgrade, there isn't even a downgrade in the rating forecast. There are no indications of mass outflows of investors or huge inflows of money abroad, bank collapses or nationalization of Israeli government funds. Shame and disgrace to anyone who collaborated with incitement, libel and incessant babble that tried unsuccessfully to sabotage the Israeli economy."
Prof. Zelicha added, "The growth forecast of the Israeli economy, as it became clearer since the middle of the previous year, is the result of the failed economic policy of the Lapid and Bennett governments, which drove per capita growth to zero."
Regarding economic policy, Zelicha said, "The current Israeli government must restart, because it has not changed anything from the previous policy. There are no growth engines in the budget, there is no significant reform that will deal with the cost of living, and there is no ladder for the Bank of Israel to stop the interest rate increase, let alone reduce it. Prime Minister Netanyahu must take the reins into his own hands."
Prof. Yaron Zelicha, Photo: Dudi Vaknin
"The current government does not have a grain of fiscal responsibility"
"Israel's failure to downgrade is good news," said former budget commissioner and chairman of the Midroog credit rating company, David Milgrom. "At the same time, it is worth understanding that when it comes to rating a company's bonds, it is common for professional elements in the company to try to convince the rating companies with various arguments that there is no justification for the downgrade on their part, but the heavier pressure a business company exerts at higher levels, the greater the concern that the company's financial situation is not particularly stable and it tries its best to prevent a shock following the downgrade."
"The natural discourse is between the professionals of the rating agency and the professional echelons of the Ministry of Finance and the Bank of Israel," Milgrom adds. "But the personal intervention of the prime minister and even the president of the country in order to prevent a downgrade testifies more than anything else to concern for the economic stability of the country."
"There is no shortage of reasons for concern: the legal revolution is a huge risk factor, but it is not the only one. The current government does not have a single grain of fiscal responsibility. It behaves extravagantly in the country's budget – billions fly in every direction and every demand, as if there are no limits. State revenues are in a dive, and both of these will affect the deficit, which is expected to skyrocket and eventually fall on the general public. The government's priorities exclude populations from the labor market, and the burden on taxpayers will increase. We must not forget our security problems. Therefore, it is appropriate for the government to waist down to deal with our deep problems and less to persuade the rating agencies to favor us."
David Milgrom, former Commissioner of Budgets, Photo: Sivan-Faraj
"In the future, the rating will continue to rise, as it was in the past"
"Today, the S&P credit rating company announced that it is leaving in place the credit rating forecast of the State of Israel. You can breathe a sigh of relief," says Dr. Miriam Schwartz Ziv of the Hebrew University and a member of the expert forum at Eldar Mortgages. "Since 1996, Israel's ranking has remained stable or risen over the years. The very discourse is not a positive or desirable thing. This stems from the political instability prevailing in the country, and particularly from the talk of the legal revolution, which harms the stability of the financial system and reduces the level of certainty that exists for those who purchase bonds issued by the State of Israel. Of course, the security situation, the decline in tax revenues, and the extent to which the state budget is managed in a way that encourages long-term growth are also factors that affect the credit rating."
"There were years when the State of Israel had to pay very high interest (even over 10%) on the bonds it issued," adds Dr. Schwartz Ziv. "When interest rates are high, it means that the state pays and rolls over huge sums of money every year for interest payments. In addition, Israeli companies are also forced to pay higher interest rates on the bonds they issue because their stability is also harmed if the stability of the State of Israel is harmed. In conclusion, it is very important that the credit rating of the State of Israel does not suffer, and that in the future the rating will continue to rise, as was the trend in the past."
Moody's headquarters, New York, photo: Getty Images
"The report is a warning sign for the Israeli economy"
"The S&P rating report avoids lowering Israel's rating horizon, based on the premise that constitutional changes will only be passed by broad consensus," explains BDO Chief Economist Chen Herzog. At the same time, the report warns that the rating may decline if there is a significant increase in political risks. The report is a warning sign for the Israeli economy: for the first time, S&P states that 2023 is actually a year of recession, that is, a year of decline in GDP per capita. S&P's estimate of negative GDP growth of 0.5% per capita."
"S&P estimates highlight the unreasonableness of the Treasury's basic assumptions in the 2023 state budget," Herzog continues. "While the budget submitted was based on the assumption of growth of about 1% in GDP per capita, S&P economists estimate a decline in GDP per capita. This means that the state budget needs to be recalculated and adjusted to conditions of economic slowdown and a decline in the standard of living."
Economist Chen Herzog, Photo: Nati Hadad
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