"As far as Israel's credit rating is concerned, what is important for us is institutional credibility. You have the Bank of Israel Law, you have a six-member monetary committee that makes decisions, and you have a central bank which has been functioning for decades," S&P sovereign credit analyst Dr. Elliott Hentov told "Globes" in an interview. The Bank of Israel is a sound and credible institution, so it doesn’t matter if you don’t have a governor for a few weeks, but if you don’t have a governor for a few months or years - that's already a different story. It is liable to harm institutional soundness and then you'll have a problem. In short, it doesn’t look good, but that doesn’t really matter now."
At a meeting before top capital market officials at Standard & Poor's Maalot Ltd. in early August, Chen-Tov offered the first remarks by a foreign party about the effect on the Israeli economy of the Bank of Israel governor saga.
"Israel became rich before its institutional structure became too strong and sound. In this regard, there is a serious weakness: the political system is very unstable; the changeover in top officials is too frequent; and there are discouraging bureaucratic and administrative aspects that delay procedures, which is a problem. From these aspects, Israel lags far behind countries that are not as wealthy as it is," says Hentov.
"I'm not saying that this aspect is what prevents Israel's credit rating from being upgraded by one notch, but I am saying that if you want to belong to the top-tier of rated countries, you must improve your level of governance. You're not Greece, but you're definitely reminiscent of Italy."
Hentov says that a sovereign credit rating is based on five factors. The first is "governance and institutional effectiveness", which examines the stability, effectiveness, and predictability in drawing up and implementing policy. "As for efficiency," he says, "Israel's score is all right, but as for stability and predictability, your scores are really bad. If coalitions are constantly replaced, top officials are constantly replaced and you don’t know who is coming and who is going, the result is clear: it's very hard to predict what Israel's economic policy will be."
As for the economy, Hentov says that there is no question that the tax hikes and spending cuts in the next economic plan will reduce growth. "These are basic economic rules," he says, but adds that Israel is not in a "recession" and that he understands people's feelings that the austerity measures are "unpopular". Nonetheless, he is optimistic, partly because of natural gas receipts, and says that Israel's growth rate will continue to outperform other OECD member states.
Hentov says that there is no real estate bubble in Israel, but that there is unquestionably a "bubble-like" situation, which could definitely turn into a bubble. He describes a bubble as systematic risk, which if it bursts is liable to affect the sovereign rating. "When a bubble bursts, you have to pay the price. But a bubble-like situation is one that we are monitoring, but has not become a problem," he says.
Hentov cites two main fears about the appreciation of the shekel, saying, "A strong dollar is not too bad for the US, because it affects just 7% of its GDP. A strong shekel affects more than 40% of Israel's GDP. That's a huge difference because the Israeli economy is export oriented."
The second problem comes back to Bank of Israel policy. "If the Bank of Israel has to regularly intervene in the foreign currency market, this harms its policy flexibility, because if the bank believes tomorrow that it has to raise the interest rate to rein in inflation, but it fears the effect on the exchange rate, its flexibility is lost and this will affect the credit rating."
Published by Globes [online], Israel business news - www.globes-online.com - on August 11, 2013
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