Moody's Investors Service senior VP Kristin Lindow, who attended the recent Midroog debt conference, is no big fan of President Donald Trump. She says, "He knows nothing about interest rates. He decides to tweet about this without any real understanding of economics. Although he was a businessman, the only force behind his business comes from selling his name."
Lindow is a little more favorable to Israel. Her Israeli acquaintances swear that her criticism is motivated by friendship and understanding. Lindow is regarded as not only the most veteran analyst covering Israel in the three major rating agencies (Moody's, Fitch, and S&P), but also the best informed one. "She has understanding and self-confidence, which enable her to exercise judgment and sometimes deviate from the rating process's inflexible methodology," an Israeli source says.
It is true that despite Lindow's purported objectivity, her criticism is colored by a specific political outlook. It is nevertheless worthwhile to listen to what she says, if only because of the fact that she is one of the people with the most influence on the Israeli government's international credit rating and indirectly on the interest rate that Israel will have to pay on its debt.
"Globes": S&P and Fitch have raised their rating for Israel in recent years, but not Moody's.
Lindow: "They only copied us by raising Israel's rating to where we put it seven years ago. We confirmed Israel's rating in September with a stable outlook. We gave Israel an A1 rating seven years ago already. Since then, Israel's debt ratio has fallen, and one of the words we use frequently to describe Israel is 'resilience' – resilience to internal and external shocks. This refers to economic management, the structure of the Israeli economy, and the high-tech niche in which Israel excels, and which guarantees the resilience of exports. The export performance is what ensured, for example, the maintenance of a positive balance of payments. Beyond that, in recent years you have had a drop in natural gas imports, following the development of the reservoirs and the possibility that you will start exporting gas."
Since you raised Israel's credit rating, the ratio of debt to GDP has fallen by 10%. Isn't that a consideration that supports a higher rating?
"Our ratings anticipate the future, so the current rating reflects expectation that the debt ratio will be lowered to where it is now. As of now, the Israeli debt ratio isn't lower than the A-rated countries in its peer group, such as the Czech Republic and Saudi Arabia. The group with the next highest rating above Israel's, Aa3, has countries with a much lower debt than Israel, or countries such as Belgium. Although they have a higher debt, their debt financing expenses are much lower than Israel's. I'm talking about a parameter called debt affordability, which reflects the ratio between government revenues and financing expenses on its debt. In Israel this ratio is 8.5% compared with 5% in Belgium, which has a government debt 40 percentage points higher than Israel."
"The relevant question is whether the political leadership has the will to continue reducing the ratio of debt to GDP. It's true that there has been a significant improvement in recent years, but recently, we sense a certain loss of willingness to continue cutting the debt. There is a degree of complacency, reflected, for example, in bending the fiscal rules you have established. I'm not convinced that the political leadership is willing to continue cutting the debt ratio."
"What else can Israel do to improve its rating besides lowering its debt?
"Defense spending is still very high. It's obvious that you're in a very tough neighborhood, but you did good work in the past in managing your security interests. Israel is distancing itself from the international community because of the settlements in contravention of UN resolutions."
Has your concern about Israel's political situation increased?
"Our announcements always say that a political settlement will benefit the Israeli economy and significantly increase investment in Israel in additional sectors currently affected by the security situation."
Is BDS affecting Israeli exports?
"From what we see, the answer is no. For the future, I'm not sure. We do see more and more countries distancing themselves from Israel because of the question of whether Israel wants to reach a political settlement. The settlements are perceived as a slap in the face to the peace process. I'm aware that the feeling in Israel is that the UN is completely biased against Israel, but I think that there is a way of handling this that has been neglected in recent years."
How will the new US administration affect the Middle East?
"While the feeling in Trump's first week was that he would let Israel do whatever it wanted to do, we heard this week that the settlements do not help the peace process. No one knows what Trump will do, but if Israel regards Trump as a blank check for doing whatever it wants, it will only worsen its relations with other countries. You know the rhetoric that says that Palestinian problem is the key to solving all the problems in the region - you can argue with that, and you can say that it's just an excuse, but it will be destructive for Israel to appear uninterested in a political solution, and it will have clear macroeconomic consequences."
"An increase in the defense budget at the expense of social issues, such as education, the struggle against poverty... we're not telling the government what to do, or what to invest in. We're only advising, but our position is based on a great deal of experience. We're objective, and we don't come with a political agenda."
Is development of the Leviathan natural gas reservoir likely to raise Israel's credit rating?
"We don't see it as such a significant factor, but it's important for there to be more than one reservoir producing gas. In addition, we see how development of the reservoir is improving Israel's international relations. I'm not sure that the improvement in relations with Turkey would have occurred at such a pace without the development of Leviathan."
How much does the state of the real estate sector in Israel disturb you?
"According to the stress tests carried out by the Bank of Israel, we see no problem there."
In addition to political concerns, Moody's pays attention to political developments in Israel. Last month, it published a notice to investors following the criminal investigation being conducted against Prime Minister Benjamin Netanyahu.
"The notice we issued resulted from the need to update investors about developments that seem important to us," Lindow explains. "We've been aware for a long time of the reports about the prime minister. The current investigation looks more serious and weighty in terms of the potential accusations. We see no clear heir in the Likud, so if the investigation forces the prime minister to resign, in my opinion it will lead to new elections."
Will early elections be a negative event for the credit rating?
"There is nothing new about the fragile structure of government coalitions in Israel, which makes us give Israel a lower rating on the governmental stability parameter, but we're used to early elections in Israel. What's interesting is that the recent developments follow approval of a two-year budget, and after Netanyahu managed to expand his coalition beyond 61 MKs, and we were already thinking, 'How odd that Israel hasn't had early elections this time' (laughs)."
Lindow is in Israel this week as the main guest at annual debt market forum of Midroog, the subsidiary and local representative of Moody's in Israel. Midroog's CEO is Eran Heimer. Lindow began working at Moody's in 1993, after having worked for many years at various macroeconomic research concerns in Washington. In addition to Israel, the portfolio of countries she covers as chief analyst also includes Russia, Turkey, Iceland, Norway, Ukraine, and Belarus. She leads a team of 60 at Moody's and came to Israel with one senior and one junior analyst. She also frequently receives help from analyst colleagues in related fields, such as banking and corporations. She visits each country annually, and conducts frequent conference calls with the Bank of Israel, Ministry of Finance, Ministry of Foreign Affairs, and private parties, including journalists.
Do you enjoy covering Israel?
"A lot. I think that this is an exciting country. I started covering Israel in 2006, just before the Second Lebanon War. I covered Egypt and Lebanon, and I think Israel is the most interesting, except maybe for Lebanon."
It is certainly more interesting than Norway.
"You'd be surprised to find out how much goes on under the surface in Norwegian politics. The government there almost fell two weeks ago because of a budget crisis."
At least there is more transparency there.
"Where transparency is concerned, you're at the same level as the Scandinavian countries. The quality of the statistical data is very, very good. The government supervisory mechanisms are very strong. (Outgoing Ministry of Finance Accountant General) Michal (Abadi-Boiangiu) always says that she knows how much money is going out at every moment."
You had very good relations with her.
"She handled very difficult situations in recent years, and I think she did it very professionally and to the benefit of the Israeli economy's interests. For example, during the period in which there was no budget because of early elections, she had to determine priorities and make sure that the budget was implemented fairly, and she did it very well. We are still in an era in which people don't expect women to have such a strong will."
Published by Globes [online], Israel Business News - www.globes-online.com - on February 9, 2017
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