Moody's approved Israel's credit rating "A1 positive" despite Netanyahu's Indictments


by Ifi Reporter Category:Capital Market Nov 23, 2019

Credit rating agency Moody's cited the strength, diversity and competitiveness of the Israeli economy in its annual report on Friday. Warns that "the ongoing election season has caused political uncertainty that has delayed comprehensive reforms and efforts to deal with the growing budget deficit."
It also states that "Israel has benefited significantly from government debt indices over the past decade, and is one of a handful of developed economies that now has a lower debt-to-GDP ratio than it did before the global financial crisis."
Israel's main weakness is its vulnerability when it comes to political risks - mainly geopolitical risks and involvement in low-scale conflicts in the region, as well as escalating tension with the Palestinians. However, the report notes that Israel's security situation has improved in recent years.
From an external point of view of analysts, such as Moody's, the Israeli economy has excelled due to its rapid growth over the last decade, relative to other industrial economies. The report also admires the high-tech sector and the economic base, which now includes gas exports - "Developing a whale reservoir will strengthen Israel's position as a positive balance of debt." .
Moody's estimates that if fiscal consolidation efforts are renewed after the establishment of a government, a term that means a painful budget cut - NIS 30 billion, according to the Treasury - the effect on the credit rating will be positive. If there is no government commitment to reduce debt and if there are security developments that disrupt Israel's economic stability, the credit outlook may be stable.

A few days ago OECD published that the Israeli economy will grow at a very low rate in historical terms, of only 2.9% in 2020 and 2021. That was the evidence from the global economic outlook for the second half of 2019 published by the OECD, one of the world's most important economic organizations, in which Israel is a member.
One year ago, the organization's economists estimated that growth in Israel will reach 3.3% by 2020, so this is a sharp downward revision. Moreover, until a year ago, OECD economists considered 2020 as a year of temporary, exceptional and temporary moderation; The fact that they now forecast low growth for two consecutive years is indicative of a change in perception - that is, beyond the numbers, the organization's message is that Israel is entering a period of moderate growth in historical view: over the past 25 years, the average growth rate has been 3.7% and in the last decade 3.8% .
The 2.9% growth rate is considered to be high relative to other member countries: According to the report, OECD countries are expected to grow at around 1.7% in the said period, with US growth approaching 2% and European economies up to 1%.
The most important variable in the context of growth data is per capita growth (total GDP growth relative to population size, AP), with Israel's natural reproduction rate being the highest in the West (3.1 children per woman), while the OECD average is 1.7 children and in Europe 1.6 .
"Domestic demand will slow down as the labor market continues to decline, fiscal incentives (increase in budget and tax cuts, AP) are declining and uncertainty due to trade wars is weighing on the rise in investment," write the organization's economists about growth in the Israeli economy. They also add that "the start of gas exports to Egypt in the coming years will improve the balance of trade and support the growth of the economy. Growth may be stronger if gas fields are developed faster, energy imports will be reduced and exports will increase. However, the continuing shekel and increased geopolitical tensions will increase. Will hurt Israel's growth, as domestic demand for the economy may slow down more quickly if the new government makes the necessary budgetary adjustments (tax cuts and increases) that are not included in the baseline projections. "
The downward revision of the growth outlook is only part of the bad news: when diving into demand detail, a complex picture emerges. First of all, there has been a steady and consistent decline in the pace of private consumption, which has become the economy's growth locomotive: from 3.6% in 2017 to only 3% in 2021.
 The numbers on investment in the economy are also not looking good: According to the organization, the increase in investments is expected to reach only a 1% low in 2020, and recover slightly to 1.8% in 2021 - a low figure compared with 4% -5% in previous years.
If that is not enough, exports, a major locomotive of the economy, are also expected to decline sharply: rising by about 6% in 2018, to 4.6% in 2019 and only 3% in 2020, with recovery expected only by 2021 - to 3.5%. However, it is important to emphasize that this recovery is largely explained by exports of natural gas from a whale reservoir, on which the organization's economists base most of the growth over the next two years.
As you might expect, the fall in growth will be accompanied by an increase - albeit moderate - in unemployment rates, reaching a low of 3.9% this year: in 2020 it will rise to 4.1% and in 2021 it will rise again to 4.3%. "Growth in private consumption will slow as the labor market cools down slightly," the economists explain.
Very disturbing - though not surprising - data appears in the section discussing the Israeli government's financial situation: Thus, the deficit is expected to jump to over 4% this year and to moderate slightly over the next two years, with Israel's debt also expected to rise to 65% when In 2017, debt was only about 60%.
According to the OECD, inflation in the economy is expected to remain very low by at least 2021, then it will reach 1.7%, still below the midpoint of the price stability target set by the government (2%). Accordingly, documents from the economists of the organization, the Bank of Israel will only start raising interest rates by early 2021 - if any - and this will be a gradual increase.
"Growth remains strong and close to the potential rate; industrial production remains robust and credit card purchases continue to expand at a good pace; business and consumer confidence remains stable despite prolonged political uncertainty; Organization economists conclude.
 This time, too, the OECD economists are giving a series of recommendations to address the complex challenges of the Israeli economy. "The new government should focus on maintaining budgetary maneuvering margins, while allowing spending to increase in areas that enhance social cohesion and productivity," it said. In another part of the review, they note that "budgetary policies need to be tightened to return debt to a downward path and to secure leverage if risks to the economy are realized."
The OECD economists also believe that the government of Israel should increase state income taxes - and even point out the right way to do so: not by raising tax rates for the entire population, but by eliminating "inefficient" tax exemptions, tax, and through the imposition of congestion . On the spending side, the OECD recommends raising women's retirement age to 67, an act that "will bring the budget deficit to a sustainable level."
However, the most important recommendations may be the longer term: "Strengthening structural reforms by improving infrastructure, especially public transport; Increasing competition in protected industries; and strengthening vocational training and education among the Arab and ultra-Orthodox sectors." The last step is defined by the organization's economists as "critical" in reducing gaps and increasing productivity in Israel, which is among the lowest in the West.

The economy grew 4.1% in the third quarter of 2019, well above market forecasts - according to a first estimate of the Central Bureau of Statistics's growth data released on Sunday. Expectations in the markets prior to the publication of the estimate were for growth of 2.6% to 2.8% in the third quarter. The surprising, higher-than-expected figure suggests that economic growth is stronger than most analysts believe, and it lowers the probability of lowering interest rates in a decision that should be made by the Bank of Israel's Monetary Committee at the end of the month.
According to the CBS, the economy grew by 4.1% in the third quarter of the year (June to September), following a minimal growth of 0.6% in the previous quarter (the figure for the second quarter is now updated to 0.7%). The increase is mostly attributable to consumption. Private (in the background of the holidays) and the increase in gross investment in inventories, the figure was even higher without the impact of trade wars, which caused a 3.6% decline in exports of goods and services.
An increase of 5% was recorded in the business product of the economy, and increases of 4.2% and 2.8% were recorded in public consumption expenditure (government and local government expenditure) and private consumption. Fixed assets, on the other hand, declined 6.1%, as stated in exports of goods and services (down 3.6%). Imports of goods and services increased by 1.9% in the third quarter of the year.
The sharp decline in vehicle imports in the second quarter shaved nearly two percentage points in growth data for the same quarter, contributing 0.4 points to growth in the third quarter. Excluding import taxes (most of them on vehicles), the growth rate jumped from 2.7% in the second quarter to 3.7% in the third quarter.
Strong growth figures are expected to reduce the probability that the Bank of Israel will decide in its forthcoming meeting on a cut in interest rates to 0.1%. Recall, the bank announced that it was considering a cut in interest rates, and two of the five members of the monetary committee even supported lowering interest rates before the previous decision in early October.



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