Title: Netanyahu’s Efforts to Prevent Credit Rating Downgrade for Israel Successful, But Future Uncertainty Remains
Subtitle: Government’s progress on regime change legislation poses potential risks for the economy
Date: May 20, 2023
In the face of a potential credit rating downgrade for Israel, Prime Minister Binyamin Netanyahu spearheaded efforts to prevent the downgrade from occurring. His intensive negotiations with the rating company S&P have yielded positive results for the time being, as S&P confirmed Israel’s existing rating of -AA. However, concerns remain about the government’s recent progress on regime change legislation and its potential negative implications for the economy.
S&P’s report highlighted the ongoing large-scale public protests against proposed legal reforms, which have contributed to political uncertainty in the country. This uncertainty, along with weak economic performance from Israel’s main trading partners and tightening monetary policy, led S&P to revise its growth forecast for Israel from 2% to 1.5% for the current year.
In the months following the publication of the rating report, there has been an improvement in the economic situation of Israel’s trade partners. However, political tensions have intensified as the government moves forward with legislation that would limit the Supreme Court’s power and undermine the independence of key gatekeepers in the country.
This unilateral regime change, which was not part of S&P’s initial baseline scenario, has the potential to harm the economy and reduce foreign investments. The legislation’s impact on the independence of gatekeepers, such as the Supreme Court and the Bank of Israel, also creates uncertainty and challenges for maintaining Israel’s credit rating.
S&P analysts defined a negative scenario in which a credit rating downgrade could occur if political risks worsen sharply, leading to economic moderation, damage to fiscal policies, and imbalances in the balance of payments. With the government’s progress on the regime change legislation, including the likely completion of the legislation to eliminate the probable cause this month, the negative scenario is becoming a reality.
If these developments continue, S&P’s reevaluation of Israel’s credit rating in November is likely to be influenced by the government’s failure to keep promises made during the previous negotiations. Moody’s, another rating company, has already lowered Israel’s rating horizon and stated that the completion of the regime change legislation would result in a downgrade.
The state budget’s allocation of funds to non-growth sectors and the government’s plans to build housing units in disputed territories further complicate the situation and make it challenging for S&P to maintain the current rating. The significant disparity between Netanyahu’s assurances to S&P analysts in May and the subsequent enactment of a substantial part of the regime change increases the risk of a downgrade.
The government’s actions have already had a detrimental impact on the economy, including a sharp reduction in foreign investment, reduced investments in Israeli tech start-ups, imported inflation due to the devaluation of the shekel, and increased interest rates. These factors have negatively affected household disposable income and overall economic growth prospects.
The threat of a coup d’état and the uncertainty it brings have already begun to affect households, causing growing monthly mortgage payments and potential long-term damage to pension portfolios. Moreover, the Israeli stock market has underperformed compared to the US and European markets, further exacerbating the negative effects of the coup d’état.
While Netanyahu’s efforts to prevent a credit rating downgrade were successful in the short term, the government’s recent legislative progress raises concerns about the future economic viability of Israel. As November approaches, all eyes will be on S&P’s reevaluation and whether the government’s actions will lead to a downgrade and further economic repercussions.