Markets get short-term boost from S&P credit rating lift

Israeli shares jumped nearly 2% on Sunday after Standard & Poor’s upgraded the country’s sovereign debt rating, and analysts said that in the short term the move would boost stocks, bonds and the shekel.

The blue-chip Tel Aviv 35 index was up 1.7% at midday. Government bonds were trading up as much as 0.8%.

The foreign currency market is closed on Sundays.

The shekel has weakened 2.5% against a basket of foreign currencies since the start of the year after appreciating 4.5% last year.

On Friday night, S&P raised its rating for Israel to “AA-“from “A+” while lowering its outlook to stable from positive, citing economic strengths and fiscal improvements.

Although Israel’s public debt remains relatively high, the ratings agency now thinks fiscal slippages leading to a significant reversal of debt are unlikely.

It said the stable outlook balances risks from an elevated security risk against stronger economic growth prospects.

The move could strengthen the shekel, though the central bank has been acting to weaken the currency in a bid to boost exports, analysts said.

It could also push down bond yields, which have been drifting higher on expectations interest rates will be raised, said Jonathan Katz, chief economist at Leader Capital Markets, noting that lower bond yields are good for the economy.

“There are a lot of international passive funds which can invest in ‘AA-‘ but not ‘A+’ countries so we could see more investments coming into Israel,” he said.

Eldad Tamir, head of the Tamir Fishman investment house, said he does not believe the ratings hike will have a dramatic change on the economy.

“The main challenges for the economy are still quite big,” he said, pointing to large sectors of the population such as the ultra-Orthodox not being fully integrated into the workforce, competition facing the hi-tech sector, a shortage of engineers and a declining education system.

Finance Minister Moshe Kahlon said the upgrade will save the economy billions of shekels in financing costs, which the government will allocate to health, education and welfare.

Kahlon’s fiscal policies were often criticized by the central bank, especially his affinity for lowering taxes. The criticism led Bank of Israel Governor Karnit Flug last month to say she would not seek a second term after her current term ends in November.

Katz, who believes Moody’s Investors Service is likely to follow S&P within a year, said most of the upgrade is already priced in to Israel’s bond offerings and any savings on interest rate payments will be modest.

Last month, Israel raised €250 million in a private bond placement to an Asian government fund at a fixed interest rate of 0.05%.

“Most foreign investors are aware of Israel’s strong fundamentals,” Katz said. “This is not a game-changer growth- wise or market-wise, but in the short term it’s a positive move.” (Reuters)