In the shadow of an iron sword war, the Ministry of Finance does not rule out a scenario of lowering Israel's rating forecast or of Israel's entry into close scrutiny by rating agencies following negative developments in the economy. However, the downgrade scenario itself appears to the Ministry of Finance at this stage to be only an extreme scenario, because Israel entered the event with excellent macro data by international comparison.
According to a senior source in the Accountant General's Department of the Ministry of Finance, "A downgrade is an extreme scenario, but it is certainly possible that we will be closely monitored – a credit watch note – that there are negative developments in the economy and there is uncertainty in the level of increased risk following war scenarios. However, the issue of downgrading is an extreme scenario. That doesn't mean we think there will be a downgrade tomorrow – absolutely not."
As for the rating forecast, the official said that this is one of the things that could happen. "I don't foresee for sure right now that this is one of the things that will happen, but this is one of the war scenarios and it depends on the scope of the war, the time of the war."
The official added: "We are at war after undergoing an unprecedented terrorist incident, the likes of which the world has not seen in decades. We understand a complex event that may last a significant period of time. It is clear to all of us that there will be an increase in government spending, an increase in civilian and defense spending. It is clear to all of us that there will also be a decline in tax collection, among other things, because of the steps we will take to make it easier for businesses in the economy. The result is that the deficit will rise."
The source explained that the credit rating reflects the ability to repay the country's external debt, which currently constitutes about 15% of the debt threshold. There are three rating companies that rate Israel, which hold two committees a year on predetermined dates. "Of course, rating companies can convene ad hoc committees to report to investors. As far as rating agencies are concerned, the war leads to an increase in Israel's risk. All rating agencies view security incidents as a parameter that may affect the rating. The war could continue for several more weeks, and each rating agency can interpret the situation as it sees fit according to its own considerations and assessments. Our baseline scenario is that one or more rating agencies will act in one way or another, such as putting Israel in credit watch or lowering the rating forecast."
At the same time, the Ministry of Finance source calmed down and said, "Israel entered the war event from a good starting point, a debt-to-GDP ratio of 60%, our external accounts are strong, there are high foreign exchange reserves, real growth on the eve of the war is around 3%, and a tight employment market. All these things allow the economy to cope very, very well."
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