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

Ratings agency says economic growth to slow to 1.5% in 2023; In reported talks with S&P representatives ahead of decision, Netanyahu vowed overhaul would not pass in original form

Prime Minister Benjamin Netanyahu, left, and Justice Minister Yariv Levin, right, during the opening of the summer session of the Knesset, in Jerusalem, May 1, 2023. (Yonatan Sindel/Flash90)
Prime Minister Benjamin Netanyahu, left, and Justice Minister Yariv Levin, right, during the opening of the summer session of the Knesset, in Jerusalem, May 1, 2023. (Yonatan Sindel/Flash90)

Credit rating agency Standard & Poor’s (S&P) affirmed Israel’s favorable rating at AA- with a “stable” outlook but cited “persistent domestic and regional political and security risks” as potential threats to the economy in its quarterly country report on Israel, published late Friday.

The New York-based S&P Global Ratings agency said Israel’s stable outlook “balances elevated regional and domestic political risks,” chief among them the judicial overhaul plans, “against the country’s resilient economy, strong balance of payments, and a moderate level of public debt.”

The agency said it expected “some form of consensus” over the suspended judicial overhaul bid, which will allow “political tensions to moderate.” Israel has seen months of weekly, growing protests against the efforts to radically revamp the judiciary, which include bills to bring most judicial appointments under political control and to weaken the check on government by the High Court of Justice. The legislative effort began in January and was temporarily suspended by Prime Minister Benjamin Netanyahu in late March amid growing public pushback and uproar over his attempted sacking of Defense Minister Yoav Gallant, who had publicly warned against the bid.

S&P said Israel’s “current political uncertainty” was expected to last for months as public protests against the judicial changes proposed by the coalition persist. Combined with tighter monetary policy as worldwide inflation persists and weaker economic performance among key trading partners in Europe and the US, the country’s economic growth was likely to “slow to 1.5% in 2023 from 6.5% in 2022,” the agency said.

If broader domestic political consensus on judicial changes prevails, Israel’s economic growth will likely “recover to an annual average of 3.5% from 2024, supported by strong performance in Israel’s diversified high-tech sector.”

The agency cited Israel’s credit strengths like its “wealthy and diversified economy,” its “flexible monetary settings and a relatively deep pool of domestic savings,” but said credit ratings are “constrained by persistent domestic and regional political and security,” like the current flare-up of violence with Gaza-based terror groups, and a similar outbreak in 2021 that led to an 11-day conflict.

In its report, S&P outlined different scenarios for how the judicial overhaul plans, spearheaded by Justice Minister Yariv Levin, play out. If the proposed legislative package moves forward in its current form, it “could further exacerbate the polarization of domestic politics” and could in the future be reversed by subsequent governments.

If the overhaul bid in its entirety is trashed, Netanyahu’s far-right and ultra-Orthodox coalition partners could find it unacceptable, which could lead to “the government resigning and another out-of-cycle general election.”

Netanyahu’s government is currently focused on passing a two-year state budget before the May 29 deadline. Failure to do so would lead to snap elections.

“Our current baseline scenario assumes that elevated domestic tensions will ultimately be de-escalated and some form of consensus will be established,” S&P said, but “the current uncertainty is likely to weigh on growth in the near term in our view.

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

Last month, Moody’s downgraded Israel’s credit rating, citing a “deterioration of governance” and rattling the Netanyahu government.

According to the economic daily Calcalist this week, the prime minister was heavily involved in talks with S&P representatives 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.

On Wednesday, the International Monetary Fund (IMF) warned 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.”

“As in any country, maintaining strength of the rule of law would be important for economic success,” it wrote.

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