Moody's warned today of the negative ramification of moving up Israel's elections. Moody's economists issued a special update on Israel, which has an A1 rating ("Stable"), and warned that moving up elections has a negative impact on the rating.
Moody's emphasized that the collapse of the government comes just 20 months after the coalition was formed.
"Israel’s political turmoil is credit negative for the sovereign because it will dampen economic confidence, delay the implementation of growth-boosting reforms and hinder fiscal planning for the next two years," says the report authored by analysts Kristin Lindow, Rebecca Karnovitz, Pamela Reyes Herrera.
The economists believe that due to the fact that budget was not passed, which means that one twelfth of the budget will be implemented each month from the beginning of 2015 until the budget is approved by the next government, the 2015 budgetdeficit is liable to be lower than the 3.4% of GDP approved by the cabinet. In this case, Israel’s debt to GDP ratio would decline slightly next year instead of rising.
"Although positive in that sense," say the economists,"it is more of an accident than emblematic of good fiscal policy management."
The economistsfurther state that thepolitical turmoil willcurb investment and dampen economic activity.
Above all, Moody's warns that the political turmoil harms the ability to make long-term plans: "The lack of policy continuity will also hinder fiscal planning. The shortened electoral cycle is likely to lead to politicians making costly promises for tax breaks or new spending programs that will affect future budgets and be difficult to reverse."
Moody's states that Israel's system of proportional representation is "inherently unstable, with coalition governments often formed by ideologically disparate partners. As a result, no administration lasts a full term. That said, this most recent administration was unusually short."
Moody's estimates that the defense budget will grow in the coming year and concludes that "Israel will need more consistent fiscal planning to keep its debt metrics on a declining path."
Fitch recently downgraded its outlook on Israel from "Positive" to "Stable," before early elections were announced.
Published by Globes [online], Israel business news - www.globes-online.com - on December 15, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2014