Moody’s Fears Israel's New Government Will Miss Fiscal Targets

The credit rating agency says the budget will be pressured by Benjamin Netanyahu’s pledges to his coalition partners.

Reuters

Moody’s Investor’s Service has warned that Prime Minister Benjamin Netanyahu’s new cabinet will have trouble keeping to budget targets next year, citing the government’s narrow Knesset majority and spending promises to coalition partners.

“While the general improvement in the economy and robust government revenues will likely yield a continued strengthening of the government’s credit metrics for this year, especially given the spending limits, the compromises negotiated to form the latest government could lead to a deterioration, instead of an improvement, in the budget deficit in 2016,” Moody’s said Thursday.

The agency didn’t revise its A1 Stable rating for Israel’s sovereign debt. A lower debt rating would force Israel to pay higher interest rates on its debt, saddling the government with extra costs.

Moshe Kahlon, the finance minister-designate, should be able to keep the budget deficit at 2.5% of gross domestic product this year, thanks to unexpectedly high tax revenues that have exceeded treasury forecasts by 3.6 billion shekels ($940 million) so far.

But Netanyahu has agreed to some 8 billion shekels in extra spending and tax cuts to secure his coalition partners, note analysts Kristin Lindow, Dietmar Hornung and Joshua Grundleger. As a result, he will have trouble bringing down the deficit, as the government is committed, to 2% of GDP in 2016.

The Moody’s report comes a week after another rating agency, Fitch Ratings, affirmed Israel’s long-term foreign currency rating at A Stable. It mentioned, however, the absence of a 2015 budget and expectations that the Knesset will not approve one until the fourth quarter — a prediction Moody’s agreed with.

Without a 2015 budget, Israel’s government is operating along the guidelines of last year’s document, with the treasury authorized to spend no more than 1/12th of the annual spending package each month.

Moody’s predicted that the Knesset would not clear a new budget before October and that it would probably be a two-year package extending to the end of 2016.

“The budget negotiation process is likely to be nearly as contentious as forming the government given the generous concessions promised to entice each of the five parties to join the coalition,” Moody’s warned.

“[Kahlon’s] ideas about land reform and measures to increase competition in the banking sector are not new and they will likely face considerable resistance from within the coalition and interest groups in the country.”