Sunday 15 September 2024
Last update on Sunday, September 15, 2024 At 7:00 AM
In recent months, the three main rating agencies have downgraded Israel's sovereign rating. Fitch was the last, last August, ten months after the start of the war. This negative development, which began before the war launched on October 7, 2023 by Hamas, does not, however, bridge the gap between the ratings assigned to Israel by Fitch, S&P and Moody's and the realities of its debt market.
According to the governor of the Central Bank, Israel is still rated at the same level as virtuous OECD countries while the markets are granting it less favorable conditions. As early as May, some Israeli economists estimated that Israel’s “market” rating was actually BBB-. The yield spread between Israeli USD bonds and US Treasury bonds is the same as for Mexico (140 basis points) while Slovenia, which has a rating comparable to Israel, benefits from a spread of only 80 basis points. Yet, Israel has no difficulty in raising funds. In April, the issue of government bonds for USD 8 billion was oversubscribed 4.5 times. The war forced the Knesset to vote two amending budgets, last December for the year 2023 and in February for the year 2024.
The 2025 budget, expected last June, is struggling to be finalized, probably because of delicate arbitrations to be made due to the uncertainties of the conflict, even though a budgetary framework has just been announced, after the Knesset resumed work on September 1. Until now, the Israeli government has been able to reconcile high so-called “coalition” spending (the highest in the country’s history, about three times higher than in previous years) with a war effort imposed by circumstances. In the Israeli budget mechanism, “coalition spending” aims to ensure government cohesion by implementing inter-party agreements.
On the military front, American aid (more than USD 14 billion) voted in April 2024 has been a great help. Despite this, the 2024 budget deficit is expected to be larger than expected, estimated at around 7.8% for 2024. The slowdown in economic growth (1.2% annual rate) is undoubtedly a major factor, explained among other things by the construction crisis which fortunately seems to be ending. What about the 2025 budget? The duration of the conflict and its intensification could strain public finances. The delays in finalizing the 2025 budget indicate the complication of questioning coalition spending to meet the demands of the moment: military spending, social inclusiveness, future reforms, etc., including tax reform. Only a realistic arbitration will be able to maintain the objective of a debt rate below 70% of GDP in the coming decade. Source: French Embassy in Israel
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