The S&P Global logo is displayed on its offices in the financial district in New York City.
(photo credit: BRENDAN MCDERMID/REUTERS)
Standard & Poor’s (S&P) decision at the weekend to affirm Israel’s AA – credit rating brought a large sigh of relief for the Israeli economy and foreign investors, especially amid expectations that the country’s budgetary deficit will widen in the coming year.
The AA – rating from S&P is the highest rating Israel has ever received from the credit agency, on par with the Czech Republic, Estonia and Qatar. The highest rating is AAA.
During Sunday’s cabinet meeting, Prime Minister Benjamin Netanyahu praised “another achievement for the Israeli economy,” describing S&P’s affirmation of the credit rating first received in August 2018 as a “very strong expression of confidence” in the country.
“The stable outlook on Israel balances external and security risks against Israel’s solid economic growth prospects,” S&P said, explaining that the ratings are supported by Israel’s prosperous and diverse economy, external balance sheet and flexible monetary policy framework.
Holding back the credit agency from granting an even higher rating, the company said, was Israel’s moderately high public debt burden, in addition to “significant security and geopolitical risks” emanating from Syria and Iran.
S&P expects Israel’s economy to “expand by slightly over 3% on average through 2022,” based on private consumption on the back of a strong labor market, continued corporate investment activity and robust service exports performance. Additional boosts will be received from the completion of the Leviathan gas field platform and Intel investments.
Finance Minister Moshe Kahlon said S&P’s announcement was “further proof of the strength of the Israeli economy and its global status” and the result of responsible fiscal policy implemented at all levels of the Finance Ministry.
In July 2018, rating agency Moody’s Corporation also upgraded its outlook for the Israeli government from “stable” to “positive,” raising hopes that it may too raise Israel’s sovereign credit rating later this year.
Credit ratings for countries play a similar role to credit ratings for individuals, as they both evaluate the creditworthiness of borrowers and the likelihood that they will repay their debts.
Rather than dealing with mortgages or individual loans, large investors will often look to national credit ratings when seeking to purchase government-issued bonds or invest abroad.
For governments, higher ratings are likely to lead to more favorable terms and lower interest rates when seeking to borrow money on the international market.
Last month, the Finance Ministry raised a record €2.5 billion ($2.88b.) from the dual-tranche issue of government bonds abroad.
The government’s 10-year €1.25b. bond offered an interest rate of 1.5% and the 30-year €1.25b. bond offered an interest rate of 2.5%. This represented the first time that the government issued a 30-year euro bond, and is one of only a few non-European countries to have done so.
The low interest rates and high demand for the long-term bonds peaking at some €15b. ($17.3b.) certainly attests to foreign investor confidence in the Israeli economy.
While S&P said it expects general government deficits to increase in 2019 to 3.3% of GDP – leading to a modest increase of public debt as a share of GDP – it forecasts fiscal deficits to decline to less than 3% from 2020 and, accordingly, for net general government debt to remain below 60% of GDP.
Despite analysts predicting in recent months that the Finance Ministry would not achieve its 2018 end-of-year targets, Kahlon announced in January that the State of Israel achieved its 2018 government budget deficit target of 2.9% of GDP.
According to data provided by the ministry, the deficit stood at NIS 38.9 billion. In 2017, the deficit was NIS 24.6b., or 1.9% of GDP.
While last year’s deficit was similar to that of the original budget, both revenues and expenditures were higher than forecast during 2018 by NIS 0.7b. and NIS 1.1b., respectively.
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