Economist explains the real reason Israel’s credit rating dropped

Finance

Prof. Yaron Zelekha, head of the School of Accounting, Economics, and Financial Management at Kiryat Ono Academic Campus, addressed the credit rating downgrade of Israel by Moody’s during an interview Sunday on 103FM.

“A door to a wave of credit rating downgrades has opened here, both for other rating agencies and for Moody’s itself. The reality of the situation did not necessitate this, and it is very, very unfortunate. I think all this dangerous and unnecessary development lies on the head of Finance Minister Bezalel Smotrich, Zelekha said.

“The rating agency clearly points the accusing finger at him because there was no real, professional reason for the credit rating downgrade,” Zelekha continued. “We have already had a very difficult war with much more severe economic implications than this, the Second Intifada, and still our credit rating did not downgrade.”

“Of course, the economic damage of the Second Intifada was significantly more severe,” he added. “The implications of the cost of war itself are just part of the economic consequences of a war. In the Second Intifada, the consequences were much more significant, and as a result, the government reached the threshold of a fiscal crisis.

“Three months ago, [however], credit rating agencies warned of a negative outlook for the economy. In the current report, they indicate what their main problem is – the lack of an economic policy vision, and a complete lack of confidence in the finance minister’s economic policy,” Zelekha continued.

Betzalel Smotrich (credit: REUTERS)

Was Israel’s credit rating dropped because of Smotrich?

“You cannot present a budget as if it is completely disconnected from the implications of the war on the economy. You cannot only worry about funding the war expenses without ensuring that your spending level matches the implications of the war,” he stated.

“Even before the war, a significant deficit of almost 3% of the GDP began to develop. The problem is that a deficit is being created regardless of the war, NIS 100 billion per year. This is not something that can be sustained over time, and when the finance minister conveys to the credit rating agencies that he is not interested in this situation, the cost of living here hinders economic growth and the government’s income development.

“On one hand,” Zelekha explained, “spending is rising regardless of the war, and on the other hand, income is affected because the growth potential is not realized. So we continue to talk about a deficit that will continue for years. The problem is not that the rating has dropped, the problem is that the rating reveals what I have been saying for a long time, that the economic policy is not suitable and is deteriorating the state of the economy,” he emphasized.

Advertisement
Zelekha continued, explaining that “before the war, we had a deficit of almost 3% of the GDP. Following the war, it is clear that we need to increase security expenses. Interest rates have risen, and of course, the expenses of the mental health system, etc., bring us to a deficit of NIS 100 billion per year.

“You need to reduce at least NIS 30b. from your ongoing spending,” Zelekha explained. During a war, you cannot grow at six percent, but you can at two or three percent. It will also have implications for tax revenue, especially after the war. But if you don’t do this and that, you will continue with a deficit of NIS 100b.”

Prime Minister Binyamin Netanyahu (credit: Mark Israel Salem)
“For Moody’s, they see turmoil due to a lack of vision. There is no horizon for the government in terms of the economy,” he added, “Throughout the year, 300 economists claimed that the judicial reform would lead to a credit downgrade, I said it was nonsense, but even I myself said three weeks ago that the credit rating would drop if this budget passes. They didn’t take me seriously, and this is the result. There is no control over the economy’s management.”

In conclusion, Zelekha said, “Regarding [President Benjamin] Netanyahu, thanks to his intervention in 2003, we didn’t experience a credit downgrade under much tougher conditions, he prevented the credit downgrade through a new economic plan. What bothers me much more is that a door has been opened here for a wave of additional credit downgrades, and that is already dangerous. It will already affect the financial markets. It is not healthy and unnecessary.

“We are a strong economy, if we weaken it with our own hands, we can overcome this war and emerge for rapid growth at its end. When you read [Smotrich’s] response, it is simply aggressive.”

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *