S&P: Israel’s Rating Could Depend on Political Developments

In interview with The Media Line, ratings director says firm will be ‘closely monitoring’ upcoming election; economic analysts warn of challenges caused by political instability.

Alternate Prime Minister and Minister of Defense Benny Gantz and Israeli Prime Minister Benjamin Netanyahu seen during a vote at the Knesset, the Israeli parliament in Jerusalem on August 24, 2020. (photo credit: OREN BEN HAKOON/FLASH90)
Alternate Prime Minister and Minister of Defense Benny Gantz and Israeli Prime Minister Benjamin Netanyahu seen during a vote at the Knesset, the Israeli parliament in Jerusalem on August 24, 2020.
(photo credit: OREN BEN HAKOON/FLASH90)
Israel’s rating could be affected by the results of its upcoming election, global ratings firm S&P has cautioned.
In an email interview with The Media Line, Maxim Rybnikov, director of S&P’s Europe, Middle East and Africa sovereign ratings team, said that the agency would be “closely monitoring the situation in the run-up to and aftermath of the planned general election, assessing the potential impact on our ratings.
“In our view, an inconclusive election outcome could present a fiscal risk in a scenario where agreeing on budget consolidation measures proves difficult or multiple spending promises become a precondition to forming a new government, leading to continued accumulation in government debt after 2021, in contrast to our current expectation that public debt would stabilize,” Rybnikov said.
The firm estimates the country’s net government debt will increase to 73% of gross domestic product by the end of 2020 as it attempts to counter the impact of the COVID-19 pandemic. At the same time, it sees public debt stabilizing at close to 77% of GDP in 2022-2023 and government deficits declining to 4% over the same period. These figures are based on the assumption that the current political stalemate will be resolved.
“If we look at the level of debt at end-2020, Israel is in the top 30% of countries with [the] highest public debt,” Rybnikov affirmed.
Nevertheless, he added, the outlook for Israel at the moment remains “stable” and the political turmoil is seen as more of a medium-term rather than an immediate risk. This is because the country retains a high level of credibility when it comes to monetary policy.
“Pre-pandemic, Israel’s economy has performed strongly compared to many other countries,” Rybnikov wrote. “Israel also benefits from a credible and effective monetary policy and a strong balance-of-payments position.”
Last week, Rybnikov and co-author Dr. Karen Vartapetov, an S&P rating director, released a bulletin warning of an “increased medium-term fiscal risk” for Israel if no clear winner emerges following the vote on March 23. The country is heading to its fourth round of elections in less than two years after the 23rd Knesset officially voted to dissolve last week.
The agency stopped short of indicating that it would in fact change Israel’s current AA- rating in the event of inconclusive results; however, it did raise concern over the collapse of the ruling coalition government.
“Israel has already gone through three inconclusive elections over the past 18 months,” the firm wrote. “Throughout this year, the coalition partners have been locked in frequent disputes with the deadline for passing the 2020 government budget repeatedly delayed.”
Economic policy experts have also warned that Israel’s political volatility and failure to pass an annual budget could result in heightened poverty rates and delay in major infrastructure projects.
Prof. Zvi Eckstein, dean of the Tiomkin School of Economics and head of the Aaron Institute for Economic Policy at the Interdisciplinary Center Herzliya, told The Media Line that the never-ending election cycles have also led to budgetary reforms being delayed.
“By going through these elections for two years Israel doesn’t really have a new budget,” Eckstein said. “The actual government activities completely ignore reforms.
“That would have a medium-term impact on the potential growth rates,” he said. “This would usually negatively affect lower-income people more, so it has the potential of increasing the poverty rate.”
Even before the pandemic, Israel had among the highest poverty rates of any OECD country. In fact, an OECD report released earlier this year showed that 18% of the country’s population lives in relative income poverty.
If S&P does change Israel’s rating, Eckstein said it would affect a number of different sectors, but he does not believe that such a decision is in the cards yet.
“Usually, the rating is related to interest rates and affects the 10-year bond rate of Israel,” he explained. “If they change the rating it would have some impact. It affects everybody: mortgage rates, loans, etc.”
Like Eckstein, Prof. Alex Cukierman, a research fellow at the London-based Center for Economic Policy Research, told The Media Line that Israel’s debt would go up if its rating gets downgraded.
“It might raise the interest rate that the state of Israel would have to pay for government debt to some extent,” said Cukierman, who for 30 years was an economics professor at Tel Aviv University as well as a member of the Bank of Israel’s Monetary Policy Committee.
“In the future, when Israel will have to repay its debt, taxes will on average have to be raised,” he said, adding that S&P’s recent bulletin is likely intended as a warning to political leaders.
The ongoing political instability could also negatively affect how Israel handles the economic fallout of the COVID-19 pandemic moving forward.
“The [lack of a budget] is actually a very serious disruption,” Cukierman asserted.
S&P’s statements come after Israel’s ruling coalition government collapsed only seven months after Likud and Blue and White signed a unity agreement. Israeli Prime Minister Binyamin Netanyahu and Benny Gantz, head of the Blue and White party, had initially agreed to join forces in May in a power-sharing government with a rotating premiership.
Both Netanyahu and Gantz have since claimed that the other has broken his coalition agreement promises.