The Standard & Poors (S&P) credit rating agency upgraded its credit rating for Israel from A+ to AA- (stable outlook), ushering Israel into an exclusive group of 15 nations that hold the prestigious AA ratings (AA+, AA and AA-). The upgrade was announced on Friday, August 3rd after S&P changed its outlook for Israel’s economy from “stable” to “positive” approximately one year ago.
This upgrade represents the highest-ever credit rating given to Israel by S&P or any other credit rating agency in the history of the nation and comes one month after Moody’s credit rating agency also raised its outlook for Israel from “stable” to “positive” in July 2018, indicating an upgrade in their rating from A1 to Aa- in the coming 12-18 months.
S&P explained its decision by stating that “Israel has demonstrated sound economic performance since the global financial crisis, with a current GDP of about $140 billion (or 50%) larger than in 2010, the current account in a sustainable surplus, and unemployment at historical lows,”.
They also added that despite Israel’s political situation being “highly fragmented” and the public debt remaining relatively high, “we now think that fiscal slippages leading to a significant reversal of the debt path are unlikely. This is based on our belief that, absent global trade shocks, Israel’s economic growth outlook will remain solid and allow the government to accommodate pressures coming from social and infrastructure spending, as well as a potential moderate escalation of security risks”.
Prime Minister Benjamin Netanyahu praised the upgrade, stating: “These decisions reflect the strength of the Israeli economy and the correct and responsible economic policy that we are leading on behalf of Israel’s citizens”.
After being at the helm of Israel’s economy since 2015, Finance Minister Moshe Kahlon also expressed his satisfaction from the S&P upgrade. "In the past three years, the Israeli economy has soared to the best macro data in its history. The confidence expressed by the strongest economic bodies in the world allows us to continue to grow the economy and to help reduce social gaps and strengthen the middle class and weaker sectors. The increased rating of AA- will save us billions of shekels in financing expenses, which we will redirect to the health, education and welfare ministries.” He said, optimistically adding "Although now it is double-A minus, this minus will disappear in a year".
Moody’s stated two main reasons for its outlook upgrade last month, one being recent positive trends in Israel’s government debt and the second Israel’s robust economy.
"The general government debt ratio has declined by more than 10 percentage points since the last upward move in Israel's credit rating in 2008 to around 60% of GDP, reflecting in part a prudent budgetary framework and a robust growth performance. This contrasts sharply against trends in many other advanced country peers both before and after the global financial crisis. For example, Israel is one of only a handful of advanced economies (including Norway, Switzerland and Singapore, which are all rated Aaa with a stable outlook) with a lower debt to GDP ratio today than before the global financial crisis. Furthermore, central government deficits have remained below 3% of GDP over the past 4 years, despite repeated upward revisions of the government's own deficit targets."
"The second driver of the decision to assign a positive outlook is Israel's increasingly resilient economy, supported by the dynamism of the high tech sector, increased energy independence and a strengthening external position, which, if sustained, will continue to support more favourable growth rates than similarly rated peers,".
Finance Minister Kahlon reacted to Moody’s outlook upgrade, stating “The rating outlook upgrade is further evidence of the strength and stability of the Israeli economy. All the data indicate that the economic policy that we are pursuing, including a free and responsible economy alongside strengthening the middle class and poorer sections of society, is the right way”.
Credit rating agencies base their ratings on the governments ability to repay its debts, but also heavily consider geo-political, macroeconomic and other strategic factors pertinent to each country, often comparing between peer countries. The ratings given by S&P, Moody’s and Fitch are the most prominent indicator of a country’s economic situation and are used to evaluate investment opportunities of many types. A higher credit rating expresses confidence in Israel’s economic policies and its future, and will allow the government to finance at lower costs.
Because of the credit rating upgrade, Israel’s capital market reacted positively with significant gains on Sunday, August 5th, seeing the largest indexes, Tel-Aviv 35 and Tel-Aviv 125, rising 1.69% and 1.55% respectively by the end of trading. This is the highest level the market has been at in almost three years. The Shekel also strengthened 0.5% against both the USD and the Euro due to the upgrade.
Looking ahead, S&P analysts predict an average year over year GDP growth of 3.3% between 2018 and 2021, resulting from private consumption, corporate investments and strong performance in the high-tech and fields of service exports.
Sources:
Wise Money Israel, The Times of Israel, Calcalist, Globes, Jerusalem Post, Ynet