In the wake of the ongoing conflict’s anticipated negative impact on the local economy, the three major global rating companies have sounded alarm bells for Israel’s financial outlook. Moody’s and Fitch both placed Israel’s rating forecast under review with a negative outlook, while S&P went a step further, downgrading the country’s rating forecast to negative.
Moreover, these rating agencies also lowered the rating forecasts for local banks, a move that has raised concerns about the increased risk associated with both the state and its financial institutions.
Despite these dire warnings, there has been an unexpected turn of events in the Israeli financial landscape. Remarkably, local stock exchanges have recorded a substantial 7% increase since the last round of rating downgrades, and bank shares have surged by an impressive 12% over the same period. This peculiar phenomenon, where markets appear to rally in response to negative rating actions, has become a consistent trend throughout the year.
Over the past year, the rating agencies have issued a total of 12 announcements related to Israel, with nine of them carrying negative sentiments. Nevertheless, their impact on the Tel Aviv Stock Exchange seems muted at best. In most cases, these announcements have coincided with changes in legal regulations, making it difficult to identify their direct effects on the market. The sole notable exception occurred during the ongoing conflict when Moody’s waived a semi-annual update, leaving the rating unchanged. On that day, the stock market dipped by 3.6%, but it promptly rebounded with a 2.5% gain the following day.
Over two months prior to this, another atypical event transpired. On July 25, the stock market took a hit even before Moody’s made an official announcement. It was widely reported in the media that an “unusual report on the Israeli economy” was expected, with hints of a potential rating downgrade. The market reacted with a 3.2% drop, only to bounce back by 2.8% the next day, after the rating agency declared a “significant risk of negative consequences” for Israel’s economy but refrained from altering the rating or rating forecast.
Financial experts suggest that the rating agencies often react too late to unfolding events. Despite their relatively swift response to the impact of the conflict on the banks, the market tends to react faster. Corporations issuing bonds sometimes run into financial trouble, and the rating agencies only react after the market has already priced in the risk through a significant rating downgrade.
The global financial crisis of 2008 further damaged the reputation of these rating agencies. Their failure to accurately assess the creditworthiness of companies that eventually collapsed with AAA ratings led to skepticism about their models. In Israel, there have been cases of companies facing financial difficulties while rating agencies have responded belatedly.
Shay Benishou, a director at Migdal insurance company, emphasized that in the short term, the global rating agencies have minimal impact on the local capital market. However, they hold greater relevance for foreign institutional investors who use these ratings as gateways into the local market. Negative rating changes can impact the cost of financing for the state, potentially resulting in increased taxes for citizens.
On a more optimistic note, Ronan Menachem, the chief economist of Bank Mizrahi Tefahot, views the rating companies as valuable tools that provide investors with critical information. Their assessments enable investors to make more informed decisions about the market and sectors.
Menachem also highlighted the rating agencies’ response during the ongoing conflict. He noted that they refrained from an immediate downgrade because they believe in a limited war scenario, aligning with the Bank of Israel’s perspective. Despite the war’s adverse impact on GDP, the agencies highlighted the economy’s resilience due to its low deficit, strong economic fundamentals, low debt-to-GDP ratio, full employment, rapid growth, thriving tech sector, and currency devaluation, which supports exports.
He concludes that a positive post-war scenario could boost the market, strengthen the shekel, stimulate the local gas sector, and drive economic growth.
In light of these observations, some experts advise against hastily exiting the stock market when the rating agencies issue negative assessments. The Tel Aviv market has already weathered substantial downturns this year, and the market’s reaction doesn’t necessarily align with rating announcements. A lower credit rating in the future might not necessarily harm the stock market, particularly if economic data and consumer sentiment improve.
In summary, despite the negative outlooks issued by rating agencies, Israel’s financial markets seem to defy conventional wisdom by rallying in the face of adversity. While the impact of these agencies on the local market may be a subject of debate, their influence on foreign institutional investors and the state’s financing costs cannot be understated. As the conflict continues and the nation navigates economic challenges, only time will reveal the true implications of these divergent trends.