Last week, the two most important credit rating agencies issued notices to investors warning of damage to the Israeli economy following the unilateral passage of the first part of the legal reform, and due to the escalation of protests and internal tensions in Israel.
Does this mean that Israel's credit rating will decline? And how will these announcements affect trading in the Israeli capital market, and what will Fitch, the third largest credit rating agency in the world, do? We turned to economists for explanations.
S& Credit Rating Company P, Photo: Reuters
Moody's, Photo: AP
According to Meitav's Chief Economist, Alex Zabezhinsky, "The reactions of rating agencies to events in Israel, including S&P's, signal that they see an increase in risk in Israel. However, at this stage, downgrading is still not the main scenario, but possible. Fitch is unlikely to lower the rating at this stage. The S&P announcement itself is not expected to have a material impact on trading in the Israeli markets. Rating agencies usually reflect in publications what is already priced."
"Harm to high-tech"
Eran Heimer, former CEO of Midroog, told Israel Hayom that the two rating agencies reacted quickly with announcements aimed at bringing international investors to the attention of an event that required attention last week. "These are not the usual follow-up reports that require a rating committee, but a kind of drawing attention in light of the fact that they both assumed after talks with the president and prime minister that the process would end in compromise and broad agreement, and therefore they did not have the last word on the matter."
The Knesset approved the cancellation of the reasonableness grounds // Photo: Knesset Channel
According to Heimer, "The two rating agencies are concerned about the impact of moves without broad agreement on the unrest in Israel and the damage to growth and investment, especially in high-tech, which generates long-term growth.
"The next S&P rating committee is scheduled for November and Moody's for October, when the actual impact on the economic parameters – growth, deficit and investment in high-tech – will be examined, and until then there is one last chance to reach a process of broader consensus, in order to reduce investors' concern about changes in the justice system."
On Thursday evening, the S&P credit rating agency also published a special and unusual report on the Israeli economy, in which it warns of the implications of the legal reform on the stability of the country's economy. This comes two days after Moody's published its unusual report on the Israeli economy.
In the report, the S&P rating agency strongly criticizes the government and the Knesset. The company notes that in its review it sees changes in the Israeli legal system as a danger to the Israeli economy.
Economic growth will slow
"The controversial reform has led to substantial public protests, and in our view, if the government and opposition do not reach agreement on the issue, it could further exacerbate internal political conflict and weigh on economic growth in the medium term," the credit rating agency said in a report. "In the short term, we expect continued political uncertainty to combine with weaker economic performance in Israel's key trading partners in Europe and the US, resulting in economic growth slowing to 1.5 per cent in 2023, from 6.5 per cent last year."
Conversations at the President's House, Photo: Kobi Gideon/GPO
The rating agency added, "We expect internal political polarization and volatility in Israel to remain high in the coming months. For now, the prospects for adopting other parts of the judicial reform remain unclear.
"Our ratings on Israel in the past have been consistently limited by local and regional political and security risks. Israel has a history of frequent elections and changes in the composition of the government, which makes it difficult to predict the direction of future policy. Still, in our basic scenario, we do not expect local political or regional tensions to escalate into a more significant internal conflict or ongoing armed conflict in Gaza or the West Bank."
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