Moody’s: Weak government in Israel means weak economy

Moody’s: Weak government in Israel means weak economy

Commenting on Israel’s poor GDP growth in Q2, the ratings agency says Israel faces considerable economic challenges

Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon attend the weekly cabinet meeting in Jerusalem on August 5, 2015. (Marc Israel Sellem/Flash90/Pool)
Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon attend the weekly cabinet meeting in Jerusalem on August 5, 2015. (Marc Israel Sellem/Flash90/Pool)

Israel’s economy faces major hurdles, said ratings agency Moody’s, pointing to a report issued last week by the Israeli Central Bureau of Statistics, in which Israel’s economy showed what Moody’s called “surprising” weakness.

Based on those numbers, the year-on-year growth of the Israeli economy is expected to be just 2.6%, significantly less than the 3% the government is hoping for. After the CBS announcement on August 16, Finance Minister Moshe Kahlon was prompted to hold a special meeting of top officials in the Finance Ministry “to determine whether government action is required to address the slowdown,” Moody’s said.

The problem is, said Moody’s analysts, that there is little the government can do, with a razor-thin 61-member coalition out of 120 Knesset members. In fact, the country’s economic troubles could put the government itself at risk.

“Less than two weeks before, lengthy and contentious negotiations among cabinet ministers yielded budget agreements for 2015 and 2016 barely in time to avoid a government collapse,” said Moody’s – meaning that Israel avoided a budget calamity by the skin of its teeth.

“A sharp slowdown in growth, if it were to persist, would endanger the deficit targets set in the carefully crafted agreements and the government’s ability to gain approval for the budgets in the Knesset, a credit negative that would likely precipitate new elections,” said the note.

Under such circumstances, the government’s range of tools is very limited. “The difficulty in reaching a budget compromise and now the news of sharply weaker growth are just some of the economic challenges we expect the new government to face and will repeatedly test the government’s ability to hold together. Moreover, fiscal authorities have little or no additional room to maneuver because spending ceilings have been set and the central bank policy rate is already virtually zero,” said Moody’s.

“As such, [Finance Minister] Mr. Kahlon’s quick mobilization of his team is unlikely to lead to concrete measures to support growth, at least over the next several months while the budget is being debated.”

The weak GDP numbers in the second quarter were actually surprising, Moody’s said, “because it showed a steeper slowdown than suggested by coincident economic indicators from the labor market, where the unemployment rate continues to fall to all-time lows even as the participation rate rises, as well as from tax revenue, which has been very buoyant.” It’s possible, Moody’s said, that the low GDP figures will be revised upwards.

If there was any upside to the economic equation, Moody’s said, it was the recent weakening of the shekel – which, if it continues, “is likely to help the struggling export sector.” Exports, said Moody’s “have been sluggish for nearly three years owing to declining global trade growth and the strong exchange rate. Exports contracted by 12.5% in the second quarter, having already declined at an 11.1% annual rate in the first quarter.” Any help in that area – such as the continued weakness of the shekel – would be welcome.

While sympathizing with Kahlon for his lack of options, Moody’s had a bit of criticism for his predecessor in the Finance Ministry. Although Yair Lapid is not mentioned by name, Moody’s pointed out that the second quarter GDP slowdown was due largely to Israelis’ keeping their pocketbooks closed.

“The second-quarter slowdown in consumer spending largely showed up in durable and semi-durable purchases, so it was likely related to consumers’ expectation of changes in taxation on home purchases rather than a weakening of consumer confidence,” said Moody’s – referring to Lapid’s failed plan to rebate value-added tax to first time homebuyers.

According to Moody’s, potential homebuyers stopped buying apartments, as well as the appliances and furniture that go in them, as they waited for the 18% VAT discount on new homes to kick in.

“Based on these early challenges and in light of global economic conditions,” concluded Moody’s, “we expect the current coalition to face significant economic turbulence throughout its tenure.”

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