International credit rating agency Standard & Poor's lowered its outlook on Israel's credit rating in a surprise announcement late Thursday. S&P, one of the world's three largest rating agencies, left Israel's sovereign long-term foreign currency credit rating at A, but changed its outlook to Stable from Positive.
Israeli economic and banking officials expressed disappointed with the measure. They said the local economy has responded extremely well in the face of the world economic crisis, and is remaining stable.
S&P did affirm all of Israel's sovereign ratings, A/A-1 for long- and short-term foreign currency and the AA-/A-1+ for long- and short-term local currency ratings. The outlook on local currency ratings remains stable, and the Transfer & Convertibility assessment remains AA.
In a statement issued Thursday in response to the revision by Standard & Poor's, the Bank of Israel said it was completely confident that the Israeli economy would be able to deal with the financial crisis and the expected global economic slowdown successfully.
"As it has stated in the past, the bank will not hesitate to use all the tools at its disposal to support economic activity and financial stability," the central bank said.
S&P said the revision reflects the rapid deterioration of the external economic environment, which may slow the decline of government debt at just below 80% of gross domestic product in 2008.
The change in outlook also reflects the political stalemate in Israel that has led to a breakdown of government coalition negotiations, preventing any real progress on negotiations with the Palestinian Authority, it said.
S&P's announcement states that Israel's economy will grow by only 2.5% in 2009. This rate is similar to the current forecasts of the Ministry of Finance and the Bank of Israel.
Finance Minister Roni Bar-On submitted the 2009 budget draft to the Knesset on Wednesday, although it is unlikely to be approved until a new government is in place early next year. S&P also cited the delay in the passage of next year's budget as a factor in its decision.
The state budget will likely be modified to account for slowing economic growth. The current version assumes an economic growth estimate of 3.5% next year, but the Bank of Israel sees a 2.7% rate, which would lead to lower tax revenue.
However, S&P stated that it did not see significant destabilizing factors in the Israeli economy.
The balance of payments is expected to reach zero next year, and therefore Israel is not expected to have problems on the foreign side. S&P also praised the Bank of Israel's decision to increase its foreign currency reserves.
"The bank is of the view that the expected approval of the 2009 budget by the Knesset in the framework approved by the government will constitute an expression of the continuation of the responsible macroeconomic policy pursued in the past," the Bank of Israel said in a statement. Israel's Finance Ministry said the expected global economic slowdown was expected to lead to a slowdown in Israeli growth.
"The ministry sees great importance in the process of approving the 2009 budget within the fiscal framework approved by the government," it said in a statement.
The downgrade is not expected to affect trading on the Tel Aviv Stock Exchange, a senior executive in the capital market sector said.
"Everyone knows Israel is biased toward exports, and therefore it is clear that with the slowdown we will export less. The fact that there is political and diplomatic uncertainty is also not new. The bottom line is that Israel's rating remained A, and that is what is important. No one will think that Israel has suddenly become riskier," he said.
"Over the past two days, we saw the stock market rise, but government bonds fell 3% for no reason at all. I want to believe that the behavior of the bond market over those days was not the result of inside information that a few people received, who knew anout the downgrade in Israel's outlook," the executive said.
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