The Jerusalem Press Club approached Prof. Karnit Flug, former Governor of the Bank of Israel, and Vice President for Research and William Davidson Senior Fellow at The Israel Democracy Institute, and asked her to analyze the announcements made by Moody’s in the past week:
Finance Minister Betzalel Smotrich recalled that the agency downgraded Israel’s outlook in 2020, but the grading subsequently rose, and added that he was not worried. Is he right not to be worried?
“In 2020 the outlook for Israel, as well as for many countries, was downgraded due to the fiscal deterioration resulting from the pandemic. The resilience that the economy demonstrated during the pandemic, its strong recovery and the positive fiscal performance when the economy recovered, as reflected in a rapid decline in the debt-to-GDP ratio, led Moody’s to go back to its positive outlook for the Israeli economy.
“What worries me most about the current situation is the fact that the Minister of Finance is not worried. I think the reaction to Moody’s decision shows that the risk to the economy stemming from the advancement of the judicial overhaul without reaching broad agreement has not been internalized.”
What could be the implications of Moody’s warning, and is there a possibility that others will follow suit?
“The risk is that if the ongoing negotiations to reach an agreed-upon reform do not bear fruit, and if the government decides to follow through with its planned reform, rating agencies will reduce the outlook to negative, or may even downgrade Israel’s credit rating. This is what Moody’s is warning against.
“This would imply higher borrowing costs both to the Israeli government and to the private sector. The government will have to spend more on servicing its debt, and will either raise taxes or spend less on social services such as education, health, welfare or investment in infrastructure. This will hurt each and every citizen.
“Such a decision by a rating agency will also be a very negative signal to investors, meaning there will be a reduction of inflowing capital, and this would imply lower economic activity and investments in general, and in particular – in the highly important technology industry in Israel.”
Taking into consideration the major crisis in the high-tech sector in the US and globally, how much can you attribute this of the current situation can be attributed to the judicial overhaul, when balancing considered it against other factors?
“At this stage, it is difficult to disentangle the various effects – that of the general weakness in the tech sector and that of the impact of the judicial overall.
“However, there are some signals from the markets that the domestic effects are significant: for example, the underperformance of Israeli stock shares relative to the S&P 500, or the Nasdaq.”
Can you offer the government any recommendations to the government on how to act now?
“To the government, I suggest reading Moody’s report with more prudence and taking it as a warning: Don’t move ahead with a reform before it enjoys broad support in Israeli society.”
