Citi sees Israel at risk of further rating downgrades

The research department of the American bank Citi has issued an analysis of the economic situation in Israel covering the credit rating downgrades made by global credit rating agencies, the latest of which was the downgrade by Fitch last week. The analysis concluded that further credit rating downgrades may be on the horizon, especially by Moody’s.

The bank describes Israel’s credit rating as uncertain, as markets do not see an end to the conflict in the region. The report’s summary notes that “Israel’s interest rate differentials in US dollars have already moved away from a neutral relative value versus A-rated credits, and the changing geopolitical risk environment makes it extremely difficult to predict when the next ‘rating repricing’ will occur.” The spread between Israeli dollar-denominated government bonds and their US counterparts is about 200 basis points.

Citi’s forecast for the Israeli economy is similar to the forecasts in Israel and the world. It expects economic growth of 1.6% this year, rising to 4.9% next year. Just yesterday, the American investment bank JPMorgan published a forecast for Israeli economic growth of only 1.4% this year.

But the outlook for the fiscal deficit is more severe. Citi sees the deficit as a share of GDP exceeding the Treasury’s target of 6.6%, reaching 7.6%. Citi says its outlook stems from skepticism about the government’s willingness to raise taxes or rein in spending, which amounts to a sharp criticism of the government. The Citi report says the string of downgrades is driven by doubts about the country’s ability and willingness to repair its balance sheet after the shock in the way it has done in the past. “We agree with these assessments: in our base case, the debt-to-GDP ratio should start to decline again, but it is not difficult to envision a scenario in which this does not happen. In terms of further credit rating action, we believe Moody’s appears most vulnerable,” it says.

This article was published in Globes, Israeli Business News – en.globes.co.il – on August 21, 2024.

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