Moody’s Cuts Israel Outlook, Citing Widening Deficit, Polarized Politics

Avi Waksman
Avi Waksman
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Finance Minister Moshe Kahlon (L) and Prime Minister Benjamin Netanyahu during a government meeting in Jerusalem, January 12, 2020.
Finance Minister Moshe Kahlon (L) and Prime Minister Benjamin Netanyahu during a government meeting in Jerusalem, January 12, 2020.Credit: Alex Kolomoisky
Avi Waksman
Avi Waksman

Moody's, the international credit rating agency, reduced Israel’s outlook from positive to stable, citing the government’s widening budget deficit, now amplified by the coronavirus pandemic, and a “more politicized political environment.”

In a report released on Friday, Moody’s retained its A1 rating for Israel, the equivalent of A-plus at other agencies. But it lowered its outlook, saying the fiscal situation had deteriorated since it had awarded Israel a positive outlook in July 2018.

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Israel’s budget deficit widened to an estimated 4% of gross domestic product last year, from an average of just over 1% annually between 2015 and 2017. Moody’s previously expected that it would not exceed 3%.

“The current crisis prompted by the coronavirus outbreak will serve to amplify Israel's already worsening fiscal trajectory,” analysts Evan Wohlmann and Yves Lemay said, estimating the deficit would reach 9% in 2020 and remain a high 5.5% in 2021.

Moody's forecast that the government’s debt burden will reach around 72% of gross domestic product by the end of this year, around 12 percentage points higher than the end of 2019.

Moody’s expressed concern that Israel’s increasingly polarized politics – evidenced by the three elections over 2019 and 2020 – was making it difficult for the country to be governed effectively. The national unity government, agreed on between Prime Minister Benjamin Netanyahu and Kahol Lavan leader Benny Gantz, is not expected to improve the situation, it warned.

“Moody's expects the domestic political environment in Israel will remain more polarized than in the past and, while a major shift in policy direction remains unlikely, [the political environment] is likely to continue to pose a headwind to prompt and decisive fiscal policy,” it said.

The unity government reduces the immediate risk of a fourth round of elections and should produce a budget to deal with the pandemic, Moody’s said. But a “more fractured political environment” will make policymaking more difficult, it added.

“There remains a significant risk of renewed political stalemate, particularly if the new government does not last beyond its initial narrow mandate to focus on the current crisis over the next six months,” the agency said.

On Thursday, another agency, Fitch, retains its A-plus rating for Israel. Standard & Poor’s rates Israel at AA-minus, higher than Moody’s or Fitch does.

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