Bloomberg News

Israel’s A+ at S&P No Relief for Biggest Shekel Drop Since 2009

September 11, 2011

Sept. 11 (Bloomberg) -- Standard & Poor’s raised Israel’s credit rating for the first time in four years just as slowing economic growth and escalating tensions with Turkey spur the shekel’s biggest retreat since the global financial crisis.

The currency fell 0.3 percent versus the dollar to the weakest level in seven months on Sept. 9 even after S&P lifted Israel’s foreign-currency credit rating by one step to A+, citing “rapid” economic growth and prospects for lower debt. The shekel will probably drop further as faltering global demand curbs exports and diplomatic tensions with Turkey deter investors, said Societe Generale SA and Bank of America Corp.

While Israel’s economy expanded by about 4.6 percent in 2010, growth fell to the slowest pace in two years during the second quarter. The shekel has tumbled 8.3 percent since June as Europe’s debt crisis worsened, Turkey said it will station more warships in the east Mediterranean and Israelis staged nationwide protests against rising prices for housing and food.

“The timing is a bit awkward” for S&P’s upgrade, said Benoit Anne, the head of global emerging-market strategy at SocGen in London. “The future doesn’t really look bright for Israel from a macro perspective.”

The threat of weaker exports, which make up about 40 percent of the country’s economy, may prompt Bank of Israel Governor Stanley Fischer to consider cutting borrowing costs after 10 increases in the benchmark rate since August 2009, said Arko Sen, an emerging-markets strategist at Bank of America Merrill Lynch in London. Europe and the U.S. are Israel’s largest export markets, according to the Jerusalem-based Central Bureau of Statistics.

‘More Pressure’

Lower interest rates “will be another reason for the shekel to stay weak,” Sen said in a phone interview. “With growth expectations falling globally, a country like Israel that’s relatively small and relies on exports for growth will see more pressure on its currency.”

The shekel’s retreat since June to 3.712 versus the dollar is poised to be the biggest on a quarterly basis since the three months ended March 2009, when the Israeli currency weakened 10 percent amid the global recession. The shekel is the fourth- worst performer among major currencies tracked by Bloomberg in Europe, the Middle East and Africa this quarter, after Turkey’s lira, Hungary’s forint and the Polish zloty.

Credit-default swaps insuring Israeli government bonds rose five basis points, or 0.05 percentage point, to 174 on Sept. 9, the highest level in almost seven months, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Stable Outlook

Swaps on Slovakia, also rated A+ at S&P, increased 11 basis points to 162 while contracts on identically-rated Chile rose eight basis points to 107, according to CMA.

The derivatives are used to hedge against losses or to speculate on creditworthiness. They pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Yields on the Israel’s 4.625 percent euro-denominated bonds due March 2020 slipped two basis points to 4.16 percent on Sept. 9, according to data compiled by Bloomberg.

Israel is poised to cut its government debt burden from the current level of 75 percent of gross domestic product, S&P said in a Sept. 9 statement. The country’s budget deficit will probably fall toward 2 percent of GDP from 3 percent this year despite protests calling for the government to cushion the impact of higher living costs, the ratings company said. The outlook for Israel is “stable” and tensions with neighboring countries including Turkey still pose “serious constraints” on the country’s rating, S&P said.

U.S. Downgrade

Even as economic growth slowed, Israel’s unemployment rate declined to 5.5 percent in the second quarter, the lowest level since at least 1985. The jobless rate dropped from a seasonally adjusted 6 percent in the previous quarter, the Central Bureau of Statistics said on Aug. 31.

The rating change followed the first review of Israel’s credit grade by S&P using new criteria that place greater weight on “the coherence of economic policies,” John B. Chambers, chairman of S&P’s sovereign-debt committee, said by telephone from New York, adding that the protests won’t derail the government’s plan to sustain economic growth.

S&P upgraded Peru and Paraguay on Aug. 30 and raised its ranking on Estonia on Aug. 9. The ratings company cut America’s AAA credit rating on Aug. 5 for the first time, citing U.S. policy makers’ failure to agree on a “credible” plan to reduce the budget deficit.

S&P’s upgrade of Israel is justified and credit-default swaps linked to the country may drop toward other A+ nations such as Chile, according to Bartosz Pawlowski, head of CEEMEA strategy at BNP Paribas SA in London. He recommended buying the shekel versus the euro.

Equity Slump

Investor concern that the U.S. and Europe may fall back into recession will drag down currencies of smaller economies including Israel, said Peter Kinsella, a senior foreign-exchange strategist at Frankfurt-based Commerzbank AG who forecasts the shekel will weaken about 2.3 percent by December.

The MSCI All-Country World Index of global stocks tumbled 3.4 percent last week after the European Central Bank cut its economic growth forecasts and U.S. data showed rising jobless claims.

Traders of Israeli interest-rate swaps are betting the central bank will cut borrowing costs to bolster the economy. The cost of fixing Israeli interest rates for two years declined to 3.37 percent on Sept. 5, the lowest level on record, and was at 3.51 percent on Sept. 9, data compiled by Bloomberg show.

‘Big Risks’

“I don’t have any concerns about Israel’s sovereign credit but the upgrade does not lessen the already high probability that the country is heading into a very tricky economic period,” said Michael Shaoul, whose $704 million Marketfield Fund beat 88 percent of peers during the past year, according to data compiled by Bloomberg. “The latter will be a much more important determinant of currency levels than the S&P rating.”

The escalation of tensions with Turkey may weaken the shekel, according to SocGen’s Anne. Turkish Prime Minister Recep Tayyip Erdogan said last week that his government may further reduce ties with Israel unless Prime Minister Benjamin Netanyahu apologizes for the killing of nine Turks last year in an Israeli commando raid at sea.

“Going forward, you have big risks,” SocGen’s Anne said. “The shekel will be more vulnerable.”

--With assistance from Emre Peker in Ankara and Alisa Odenheimer in Jerusalem. Editors: Laura Zelenko, Linda Shen

To contact the reporters on this story: Tal Barak Harif in New York at; Maria Levitov in Moscow at; Michael Patterson in London at

To contact the editor responsible for this story: David Papadopoulos at

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