Last night (Friday), the credit rating company Moody’s approved Israel’s credit rating at A1 level and updated the rating forecast to “positive” following the strong fiscal performance and strength of the Israeli economy.
The increase in the forecast means that Israel’s credit rating may rise in the range of up to two years. In July 2018, Israel’s rating forecast rose to “positive”, but in April 2020 it was updated to “stable” following the corona crisis.
Moody’s notes that the reasons for raising the rating outlook are, among other things, the promotion of structural reforms by the current government, designed to address the long-term challenges of the Israeli economy, as well as the rapid recovery of the economy and optimal fiscal performance. Significantly beyond initial forecasts.
Finance Minister Avigdor Lieberman revealed last week that the government deficit fell in March to 1.5% from 2.2% in February.
The deficit is expected to be 3.4% at the end of the year
The rating agency notes that promoting structural reforms such as reducing the regulatory burden, raising the retirement age for women, integrating labor market populations and developing infrastructure will help address key economic challenges, including moderate productivity growth and a low labor force participation rate among sections of the population. It is also excellent for the reform of the designated bonds, which is expected to lead to savings in government financing costs.
The company’s announcement states that the performance of the Israeli economy has beaten forecasts due to high tax revenues. This is reflected in the reduction of the government deficit by 7% of GDP within one year – one of the strongest performances among the countries of the world. The company expects that the deficit will stand at 3.4% at the end of 2022, a rate lower than the original target of 3.9%.
The debt-to-GDP ratio began to decline last year and the company expects it to reach 64% by 2024. Company representatives note that although the political environment is polarized, there is broad agreement on economic and fiscal policy.
The company’s announcement said that the credit rating approval, at the level of A1, reflects a balance between a stable economy with good growth data and a high public debt burden. The company’s representatives also note the government’s proactive policy and growth data during the corona plague, which were better than most OECD countries, with a negative growth rate in 2020 that stood at only 2.2% and a high growth rate of 8.2% in 2021.
The company notes positively the resilience of the Israeli economy and its ability to recover quickly from local and external shocks as well as the rapid response of the government in dealing with the corona crisis. In addition, it was noted that Israel’s exposure to the current conflict between Russia and Ukraine is limited and has little impact on the economy, partly due to domestic gas production and in light of limited foreign trade with Russia.
The announcement states that the geopolitical tensions still exist and these constitute a limit on the credit rating, despite the friendly relations created with Arab countries as a result of the signing of the Abrahamic Agreements. The announcement also states that in recent times there has been relative political stability, after a long period of high uncertainty which has begun to negatively affect the effectiveness of fiscal policy. However, given the losing majority of the coalition in the Knesset, it remains to be seen whether the current government will be able to implement the structural reforms planned while pursuing a responsible fiscal policy, also in light of the fact that the high tax revenues will likely turn out to be temporary.
The company notes that the rating increase may occur in a situation where fiscal convergence and debt reduction will continue, along with strong growth and the implementation of structural reforms that will help increase productivity over time.
Alternatively, Moody’s may return the rating outlook to “stable” and even lower its credit rating if fiscal convergence and debt reduction do not materialize and the debt-to-GDP ratio increases significantly.
“Expressing confidence in the Israeli economy”
The Minister of Finance, Avigdor Lieberman: “I welcome the decision of the rating company Moody’s to raise Israel’s rating forecast. Appropriate for the needs of the economy and the promotion of structural reforms that constitute engines of growth for the coming years. “
The Accountant General, Yahli Rotenberg: “Modi’s announcement of raising the rating outlook to ‘positive’ is an expression of confidence in the Israeli economy and debt management policy. This announcement comes against the background of the excellent data published last month These data indicate the rapid recovery of the economy from the corona crisis and the responsible management of fiscal policy with a long-term vision. “The forecast for ‘positive’ will be translated into raising the credit rating, thus Moody’s will join S&P, which raised Israel’s credit rating to AA- in August 2018.”