S&P, the global ratings firm, said on Thursday that continued political fragmentation in Israel and a possible failure to produce a ruling coalition after the elections set for March 2021 could reduce the likelihood of the nation setting out effective measures to rein in its pandemic-inflated debt, which could put pressure on its sovereign ratings.
“Pressure on the ratings could build if net general government debt continued to rise over the medium term,” S&P said in a “bulletin” Thursday, after Israel’s parliament dissolved and new elections were called.
“Delivering specific and effective budget consolidation measures will likely prove considerably more difficult politically compared with this year’s stimulus,” S&P said. “In our view, continued political fragmentation and a possible outcome of a hung parliament in March would act to reduce the likelihood of such measures being adopted.”
S&P emphasized that it does not expect any immediate change in Israel’s AA-Stable rating, but, it said, “the continued political brinkmanship and the possibility of another inconclusive election result could increase medium-term fiscal risks.”
The dissolution of parliament was triggered on December 23, after the deadline for the passage of a 2020 budget elapsed, paving the way for the fourth general election in two years.
“Israel has already gone through three inconclusive elections over the past 18 months,” S&P said. “An inconclusive electoral outcome could jeopardize” the formation of a stable government with a clear economic and fiscal policy agenda.
“Elevated political tensions are nothing new in Israel, given its highly polarized ideological and religious landscape,” S&P said. “However, this time the degree of domestic political volatility is compounded by the COVID-19 pandemic as well as the legal trial against incumbent Prime Minister Netanyahu commencing in February next year. We therefore expect uncertainty to remain elevated in the coming months.”
Economic measures to counter the impact of the pandemic, alongside the pandemic’s impact on growth, are expected to increase Israel’s net government debt in 2020, S&P said.
“We estimate a rise to 73% of GDP by the end of 2020, from 59% at year-end 2019, effectively undoing the fiscal consolidation of the last decade in a single year,” the bulletin said.
S&P sees public debt stabilizing at close to 77% of GDP in 2022-23, and the government deficit declining to 4% for the period, based on the assumption that the government will start efforts to consolidate fiscal accounts starting from the second half of 2021.
If that doesn’t happen, given the political instability, the pressure on the ratings could build, S&P said.
The bulletin echoes an interview the Times of Israel held earlier this month with Christian Esters, senior director, analytical manager, Sovereign and International Public Finance Ratings, S&P Global Ratings, who warned that Israel’s political stalemate could hinder its ability to bring spending under control in 2021, triggering a “real risk” of a downgrade of its sovereign rating.