Israel’s Political Limbo Endangers Credit Rating, Says Moody’s

After Israel’s third election in less than a year ended with uncertainty, Moody’s Investors Service warned Thursday that a fourth election or an unstable coalition that will lack the strength to make the cutbacks and tax raises needed to tackle Israel’s ballooning budget could risk Israel’s current A1 credit profile.

In an issuer comment, Moody’s said the ability of the next government to continue decreasing the debt to gross domestic product (GDP) ratio will play a major part in Israel’s next credit evaluation. Following Finance Minister Moshe Kahlon’s tax cuts and his enlargement of the spending envelope, the debt to GDP ratio jumped to 60.9% in 2018. In 2019 the ratio dropped to 60%, but it was due to technical reasons that will be offset soon, according to the ministry and the Bank of Israel.

Moody’s also commented on Prime Minister Benjamin Netanyahu’s indictment in three corruption cases on suspicion of accepting bribes, fraud, and breach of trust. The agency stated this is the first time such charges are brought against a sitting prime minister and that they “would also add uncertainty to the stability of a coalition led by him.” Though the trial is set to start March 17, the full legal process could take years, Moody’s said, “and could ultimately weaken our assessment of the strength of Israel’s institutions, particularly if it posed a challenge to the independence of the country’s judicial system including the ability of the courts to act as a check on the exercise of government power.”

The credit agency has stated that odds of a coalition being formed are better now, as most parties have little to gain from a fourth election round. Moody’s has cautioned, however, that it is still unclear which coalition could be formed, given that neither Netanyahu’s right-leaning bloc nor Benny Gantz’ center and center-left bloc currently have enough seats for a coalition.

“The risk of a major change in policy direction from a new coalition government is low given the broad consensus among the mainstream political parties on the basic tenets of economic

and fiscal policy. That said, any governing coalition is likely to rely on a small majority which may constrain its ability to pass legislation,” Moody’s wrote. “A fourth election which materially delays steps to address the challenging fiscal trajectory remains a distinct risk.”