Commenting on the Israeli economy's weak growth in the second quarter, international rating agency Moody's says that if the slowdown persists, this could lead to missing deficit targets and possibly to new elections, which would be negative for Israel's credit rating.
Noting that agreement among the coalition partners on the 2015-2016 budget was reached "barely in time to avoid a government collapse", Moody's analysts Kristin Lindow and Joshua Grundleger write, "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. The new coalition, which took nearly two months to form following the 17 March election, has a fragile one-person majority in the Knesset. 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."
Lindow and Grundleger do not believe that the discussions set in motion by Minister of Finance Moshe Kahlon on measures to revive growth are likely to lead to concrete steps. "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. As such, 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," they write.
The Moody's analysts do see a ray of light coming from the foreign exchange market, where the shekel has been weakening. "A recent weakening of the shekel exchange rate, if sustained on a trade-weighted basis, is likely to help the struggling export sector," they write.
Published by Globes [online], Israel business news - www.globes-online.com - on August 24, 2015
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