S&P Cuts Shekel Credit Rating

Local-currency credit rating in Israel was cut to the same level as the foreign-currency rating on Thursday.

The Standard & Poor’s rating agency lowered Israel’s local-currency credit rating yesterday but left its foreign-currency credit rating unchanged.

The foreign-currency rating was confirmed at A‏+, with a Stable outlook. But the local-currency rating, which had previously been higher, was cut to the same level as the foreign-currency rating, A‏+.

The government played down the development.

“The lowered rating at this time isn’t surprising,” Finance Minister Yair Lapid said. “This is a belated response to the situation we are now trying to rectify. We have to look in the mirror and say honestly, ‘2013 and 2014 are the two years in which we’ll eliminate the overdraft.’ And in making this correction, we’ll begin to take off.”

“We are now changing the order of priorities,” he continued. “The working man will be at the center; the cost of living will fall. Only thus can the economy grow and maintain its standing. We’re now taking responsible steps, and as long as I am finance minister, this responsible policy will be maintained.”

The downgrade came a day after reports that Lapid plans to exceed this year’s spending cap in the state budget by NIS 6.5 billion, a move that will increase the fiscal deficit to 4.9% of gross domestic product, well above the 3% that had been targeted.

Lapid said that Bank of Israel Governor Stanley Fischer voiced his support yesterday for the treasury’s plan to bring down the deficit to 3% in 2014, and to adhere to the spending limit laid down by law.

S&P said its Stable outlook for Israel was based on the political consensus over the need to reduce the country’s public debt, given the current fiscal situation. But it lowered the shekel rating because of the recent decline in fiscal performance, despite the fact that other economic fundamentals are generally strong. Among Israel’s positives, it said, were a flexible monetary policy and strong external accounts.

The agency also explained that under its methodology, a gap between a country’s foreign-currency and local-currency ratings can’t be maintained at a time when fiscal policy constitutes a significant negative factor in the rating.

Ofer Vaknin