S&P affirms Israel’s credit rating, warns of ‘persistent’ domestic, regional risks

Credit rating agency Standard & Poor’s (S&P) keeps Israel’s favorable rating unchanged at AA- with a “stable” outlook but cites “persistent domestic and regional political and security risks” as potential threats to the economy.

The agency expects “some form of consensus” over the contentious judicial overhaul bid which will allow political tensions to moderate, it says in an announcement. The suspended government push to weaken Israel’s judicial system radically has dealt a blow to the economy, spooking investors, economists, and credit agencies, among others.

“We expect the current political uncertainty, combined with weaker economic performance in Israel’s key trading partners in Europe and the US as well as tighter monetary policy, to cause Israeli economic growth to slow to 1.5% in 2023 from 6.5% in 2022,” says S&P in its quarterly country report on Israel.

It also cites Israel’s credit strengths which include its “wealthy and diversified economy,” flexible monetary settings and “a relatively deep pool of domestic savings.”

“We could raise the ratings if we saw a significant reduction in regional and domestic political and security risks,” the agency says.

Last month, Moody’s downgraded Israel’s credit rating, citing a “deterioration of governance” as the government led by Prime Minister Benjamin Netanyahu has moved to revamp the judiciary. The premier suspended the efforts in late March amid societal upheaval but members of his coalition have vowed to press forward.

Moody’s downgrade rattled Netanyahu and according to the economic daily Calcalist this week, the PM was heavily involved with talks with S&P to get the credit agency to affirm Israel’s stable rating. According to the report, Netanyahu assured S&P economists that the judicial overhaul would not be carried out in its original form.

Israeli President Isaac Herzog, who is holding compromise talks on the overhaul without much headway, was also reportedly involved in the talks with S&P.

The IMF warned this week that prolonged uncertainty over Israel’s judicial overhaul presents a “notable downside risk” to the country’s economy.

“Absent the emergence of a durable and politically sustainable solution, continued uncertainty could significantly increase the price of risk in the economy, tightening financial conditions and hindering investment and consumption, with potential repercussions for growth, also in the longer term,” the IMF said in its initial country report on the Israeli economy. “Permanently lowering the uncertainty around judicial reform requires a politically sustainable solution that is clearly communicated and well understood both domestically and abroad.”

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