The Standard and Poor's (S&P) credit rating agency announced Saturday that it has upgraded Israel's credit rating from A+ to -AA, the highest rating Israel has ever had.
The raised rating is a very significant achievement for the Israeli economy and indicates confidence in the ability of the economy to grow and the government's ability to maintain a responsible fiscal policy. On the practical level, it will allow the government to raise funds under better terms.
Raising the rating to AA-minus puts Israel among a relatively small list of countries in the AA-rated family, and places it above countries such as China, Japan and Chile.
Currently, there are 17 countries that share the prestigious AA rating: along with Israel there are six countries with a –AA rating (including the Czech Republic and Qatar), seven countries with the higher AA rating (including Belgium, Britain and Kuwait) and four countries with AA+ (including the US and Finland).
Only 11 countries worldwide rank AAA, including Switzerland, Australia, and Norway.
Credit rating agencies put an emphasis on the ratio between Israeli government debt and the gross domestic product (GDP), which has been declining in recent years due to higher-than-expected tax collection and the stability of government institutions, as well as fiscal and monetary policies.
3.3% average growth in coming years
The rating agency estimates that the Israeli economy will grow by an average of 3.3% between 2018 and 2021, with growth coming from private consumption, continued investment by corporations, and strong performance in the field of services exports.
S&P analysts noted the success of the government, despite internal coalition differences, to pass the 2017-2018 budget as well as that for 2019, and more importantly, its success in maintaining fiscal discipline. This success is largely the result of the law that prevents politicians from committing to programs without having a budget source.
The agency also considered the multi-year agreement between the Ministry of Finance and the Ministry of Defense (signed between Finance Minister Moshe Kahlon and previous Defense Minister Moshe Ya'alon), whose future is already in doubt due to new Minister Avigdor Lieberman's demands for additional funds, Kahlon's efforts to promote a civil defense program without cooperating with Lieberman, and the failure to include the budgetary pensions of career soldiers in the agreement.
Like other rating agencies, S&P also expressed doubt regarding the current government's ability to deal with complex issues that require long-term care, such as excess bureaucracy, a severe shortage of infrastructure and the integration of the Haredi and Arab populations into the labor market.
They also noted that the government's structure may also limit its ability to cope with challenges in the housing market. Housing prices are listed as one of the primary challenges facing the Israeli economy.
S&P further noted that the geopolitical security situation, although still tenuous, has moderated slightly.
The rating agency noted that a weakening of economic or fiscal performance, as well as a significant escalation in the security situation, could harm Israel's credit rating. At the same time, the likelihood of raising the rating in light of further improvement in performance is currently low. The report also noted that the likelihood of a significant fiscal weakening has diminished in light of the strong economic growth that is supposed to compensate for some of the tax cuts.
Prime Minister Benjamin Netanyahu praised the S&Ps decision to raise Israel's credit rating: "The decision by Standard & Poor's to raise Israel's credit rating joins a similar decision by Moody's. 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."
Last month, Moody's upgraded Israel’s credit rating outlook to "positive" and reaffirmed it at A1, after the company's representatives visited Israel last June. The positive outlook means that the credit rating is not expected to decrease this year, but if the rating does not rise, the forecast will be changed to "stable."
Finance Minister Kahlon also expressed satisfaction with the positive development: "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."