Despite the legal revolution: the rating company S&P reconfirmed Israel’s credit rating at the level of AA-, leaving the rating forecast at a “stable” level. In recent weeks, the government feared that the agency would lower Israel’s rating horizon, similar to Moody’s.
As for economic growth, S&P cuts the front for the Israeli economy. From an expected growth of 2%, it is now estimated that the economy will grow by only 1.5% in the coming year. However, the agency predicts that starting in 2024, the Israeli economy will stabilize, and return to the pace they expected before – 3.5% per year. However, the forecast is based on a decrease in local political volatility and an improvement in the global economic situation.
In the abstract of the report they wrote: “Extensive public protests against the legal reform proposed by the coalition continued in Israel, despite the freezing of the changes until the negotiations between the government and the opposition are completed. Our base scenario assumes that a certain agreement will be reached, which will allow a recession of the increased political tensions.”
In the S&P assessment, they warned that the current political situation, which is characterized by uncertainty and polarization among the people, may have a negative impact on the Israeli economy. “If the reform is implemented in a manner similar to the original proposal, we anticipate a deepening of political polarization,” the agency’s economists wrote, “We estimate that the tension will expire and that the parties will reach some sort of agreement. Although we estimate that the tension levels have decreased, the current uncertainty may affect growth in the near term. Among other things, There could be a delay in local and foreign investments.”
They referred to inflation in Israel and the subsequent increase in interest rates: “While inflation in Israel increased last year, it remained significantly below that observed in other developing and developed markets, including the US and the UK. We expect average inflation of 3.8% in 2023, slowing from a rate of 4.4% in 2022. Domestic inflation has slowed in light of Israel’s growing dependence on domestically produced gas, which partially offsets the impact of rising global energy prices. However, the Bank of Israel responded to the rise in inflation by starting a monetary tightening cycle and raising interest rates since April 2022, which currently stands at 4.5%. In our view, Israel is approaching the end of the current monetary tightening cycle.”-
Similar to the IMF’s assessment earlier this week, S&P also estimates that Israeli growth will slow down in 2023, both due to internal tension and due to the effects of the global recession. “We anticipate that the current political uncertainty, combined with weaker economic performance in Israel’s main trading partners in Europe and the United States, will result in a slowdown in growth in the Israeli economy to 1.5% in 2023 from 6.5% in 2022,” they explained. “Together However, Israel still enjoys a number of strong characteristics such as a diversified economy, a strong balance of payments and a moderate level of public debt. Close to 90% of the government debt is held by locals and is denominated in the local currency.”-
“It is difficult to predict the course of events”
The S&P credit rating update posed a slightly different challenge than the Moody’s rating update last month. Israel’s rating in the S&P agency is higher – AA- in S&P compared to A+ in Moody’s. However, Israel’s rating forecast was stable – and its downgrade was expected to inevitably give Israel a “negative” label, compared to the “neutral” label it received from Moody’s.
At S&P, the credit rating is performed according to several categories, with each country receiving a numerical score. The agency examines, among other things, the functioning and stability of the institutions, the fiscal situation, and the assessment of future growth. Despite the proposed changes in the legal system, S&P did not see fit to change Israel’s score in any category. Israel already has a very low score for the stability of institutions – 4 out of 6. The agency will probably wait to see what changes, if any, will be made in the judicial system in order to lower this rating.
It seems that, like Moody’s, S&P is waiting to see “results on the ground” before changing Israel’s credit rating. “In our view, there is a difficulty in predicting the future course of affairs with regard to the proposed legal changes. From the recent statements of the coalition members, it appears that the likelihood of a scenario in which the reform will pass as initially proposed is decreasing,” the agency estimated, “on the other hand, it is not clear whether the more right-wing parties of the coalition will see A complete delay of the reform is acceptable. This could lead to the dissolution of the government and further elections that are not on time.”
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