The downtrend in the ratio of government debt to GDP is the main fiscal consideration in keeping Israel's credit rating steady during a period with growing signs of economic slowdown, political instability, and burgeoning geopolitical risk, Kristin Lindow, senior VP at international credit rating agency Moody's, told "Globes." She added that despite the frequent change in government and Netanyahu's fragile coalition, the internal political risk in Israel is considered relatively low, while on the other hand, the growing security risks in the region constitute a main source of concern for Israel's future credit rating.
Lindow, considered the senior professional at Moody's, is responsible for monitoring the Israeli economy. In a talk with "Globes," Lindow criticized the government's policy of bending the fiscal rules designed to bolster the credibility of the government's budget policy and reduce the ratio of debt to GDP. Enacted in 2005, these rules are aimed at restricting the growth in budgetary spending and ensuring that the budget deficit stays on a downward path. In practice, the rules have been rewritten almost every year since they were enacted, Moody's writes. "The credibility of the fiscal rules is being significantly undermined as a result of government policy in recent years," Lindow says. "A rule has no meaning if it is not obeyed. In the end, however, when the dust settles, we see that the debt continues to improve, so that the government's policy remains credible, even if the fiscal tools in the law have no such credibility."
Moody's economic growth forecast for 2015-2016 is similar to that of the Ministry of Finance, the Bank of Israel, and the Organization for Economic Cooperation and Development (OECD). Where the budget deficit is concerned, Moody's expects it to be 2.5% of GDP - lower than the Ministry of Finance forecast for 2015, despite the tax cuts. The Ministry of Finance predicts a 2.9% budget deficit, probably because it realizes that the Ministry of Defense will obtain a budget supplement. Like the Ministry of Finance, Moody's expects the 2016 budget deficit to be 2.9% of GDP as a result of the new wage agreements with the state workers and the reductions in VAT and corporate tax, whose effect in 2015 will be very limited.
On the other hand, Moody's believes that the ratio of government debt to GDP will continue to fall, dipping 0.5% in 2015 and by 0.3% in 2016.
Moody's compliments Prime Minister Benjamin Netanyahu and Minister of Finance Moshe Kahlon for cutting 40% of the commitments in the coalition agreements in order to ensure a continued decline in the debt-GDP ratio in 2015. "The improvement in Israel’s government debt metrics has progressed steadily in spite of various economic and political disruptions, both external and domestic," Moody's writes. "Aside from the intermittent geopolitical flareups, Israel’s system of proportional representation is inherently unstable, with coalition governments often formed by ideologically disparate partners. As a result, no administration lasts a full term. In spite of this volatility, fiscal management has been effective in recent years, helped by strong nominal growth, shrinking interest payments and reduced defense spending. We note, for example, that Israel is one of only a handful of advanced economies (Norway, Switzerland and Sweden all rated Aaa with a stable outlook being the others) that has a lower debt-to-GDP ratio now than before the global financial crisis. In fact, OECD governments’ gross financial liabilities-to-GDP ratio registered a 20.2 percentage point increase to 113.8% between 2009 and 2014, whereas Israel’s gross debt to GDP ratio dropped 8.0 percentage points to 67.1% over the same period."
On the other hand, when Israel is compared with its peer group, which includes Poland, the Czech Republic, Belgium, and South Korea, it emerges that the government debt ratio is still 50% higher than the average.
The results of the effective debt management by the Ministry of Finance at the hands of Accountant General Michal Abadi-Boiangiu and Yaheli Rotenberg, her deputy, are reflected not only in the lower debt ratio, but also in a series of other parameters, headed by the ratio of interest expenses on its debts to its revenues (debt affordability).
Moody's notes that this ratio has improved substantially, even though state revenues (as a percentage of GDP) have fallen 5% since 2007 (mainly due to lower taxes, A.B.). The main reasons are the smaller volume of debt and lower financing costs. Moody's also cites Israel's success in lengthening the average duration of its debt, which is currently 7.4 years to maturity, compared with 6.4 years in 2009.
Another interesting figure mentioned by Moody's is that 90% of the government's capital raising is done on the local/domestic market, with excess demand being in a ratio of 1:4.8. Moody's believes that this indicates that "the capital market is deep and highly developed." The proportion of debt denominated in foreign currency is still a relatively high 13.9% of total government debt, among other things as a result of bond issues by Israel Bonds, which has $7 billion in outstanding debt. The government debt unit believes that foreign investors hold 6.4% of the marketable shekel-denominated debt.
Published by Globes [online], Israel business news - www.globes-online.com - on October 11, 2015
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