US rating agency Fitch has announced that it is affirming Israel's credit rating and outlook unchanged at A+ and Stable. Fitch wrote, "Israel's 'A+' rating balances a diversified, resilient and high value-added economy and strong external finances against a relatively high government debt/GDP ratio, ongoing security risks and a record of unstable governments that has hindered policymaking."
Regarding the changed in the judicial system, Fitch adds: "The government's initial judicial overhaul package has been watered down but remains highly controversial and faces strong civil society and political opposition. Parliament has already passed legislation that stops the Supreme Court from striking down legislation on the basis of 'reasonableness'. The government also wants to change the process for appointments to the committee that selects judges, but it has indicated it may no longer seek to give an automatic majority in the appointment committee to the ruling coalition, and has dropped an initiative that would allow parliament to override Supreme Court decisions against legislation.
"Fitch believes the changes may have a negative impact on Israel's credit metrics if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment or weakens governance indicators. Some countries that have passed major measures reducing institutional checks and balances have seen a significant weakening of World Bank governance indicators (WBGI), the variable with the highest weight in Fitch's Sovereign Rating Model (SRM). Implications for Israel's WBGIs are unclear. Fitch considers the current measures are unlikely to trigger a material exodus of talent and capital in the high-tech sector."
"The scope for additional measures that could impact the credit profile is also unclear. Some MKs and members of government have made proposals to weaken central bank independence but none has been implemented. While not our base case, a weakening of central bank independence would reduce the credibility of Israel's policy-making."
Israel's credit rating with Fitch has remained unchanged since 2016. But if in previous years the rating agency's announcement was met with indifference, or even disappointment in the hope that the rating might be raised, in the current situation the reaffirmation is the most positive news for the country's economic policymakers.
Fitch is the first of the three major rating agencies to announce its annual rating for Israel. In the coming months Moody's, which rates Israel as A+ with a Stable outlook, the same as Fitch, and S&P, which has Israel with a higher AA- rating and Stable outlook, will announce their ratings.
On Israel's economy Fitch says it sees a slowdown: "We project growth of about 3.1% of GDP in 2023 and 3.0% in 2024, below the Bank of Israel's (BOI) estimate of potential at around 3.8% per year and after 6.4% in 2022, due to base effects, slow global growth and tight monetary policy. Our base case assumes limited impact from the judicial changes beyond the protests' impact on consumption and a delay in some capital investment decisions, although risks of a greater impact remain. Growth will be supported by continued exports from the high tech and the defence industries as well as strong population growth."
Published by Globes, Israel business news - en.globes.co.il - on August 14, 2023.
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