International credit rating agency Fitch Ratings has affirmed Israel's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A+' with a Stable Outlook. The agency says that the rating balances strong external finances, a diversified high value-added economy and solid institutional strength, against a government debt/GDP ratio that is high relative to peers, and ongoing political and security risks.
Fitch expects the global repercussions of the Covid-19 pandemic and domestic containment measures to cause real GDP to contract by 5.6% in Israel in 2020, and that the lockdown in the country will be progressively eased from the end of April 2020, with a lingering impact through early 2021. Assuming a progressive normalization of the health crisis in Israel and globally, the agency projects 5% growth in GDP in 2021, and around 3% annual growth thereafter. Unemployment is expected to remain close to 10% at the end of 2020, well above its end 2019 level of below 4%.
Israel's Accountant General Rony Hizkiyahu said, "The affirmation of the rating at a time of unprecedented global crisis indicates the company's confidence in the Israeli economy and brings home the need to maintain fiscal discipline even as we deal with the consequences of the coronavirus pandemic in Israel."
Fitch says that it expects the Israeli government's fiscal deficit to surge to over 10% of GDP in 2020, and that the government debt/GDP ratio will to rise to around 77% in 2020 from 60% in 2019, well above the forecast median of around 56% for 'A' category sovereigns. "Israel still operates without a formal budget due to the lack of a coalition government and is constrained by a spending limit of 1/12th of the 2019 budget each month. However, despite the lack of a formal government, the Knesset voted a budget extension of NIS 50 billion in order to fund specific lockdown-related measures announced by the caretaker government and an additional NIS 40 billion increase to the budget deficit compared with the 1/12th rule. We expect the deficit to remain large in 2021 at over 4.5% of GDP due to partial revenue recovery," Fitch's analysts write.
"While Israel has a strong track record of debt reduction, fiscal discipline has loosened in recent years, casting doubt on the authorities' ability and willingness to adequately address the rising trend in government indebtedness once the health crisis subsides. Over the past four years the structural deficit increased due to unfunded spending increases, while one-off tax receipts kept debt on a downward trend until 2018. The continuous difficulties forming a government since the April 2019 elections effectively led to the postponement of any fiscal consolidation measures and Israel operates without an up to date budget. The 20 April coalition agreement stipulates that a budget for 2020 and 2021 should be passed within three months, which could clarify the authorities' fiscal priorities after the health crisis, although the coalition appears fragile and fiscal consolidation could be seen as politically costly," Fitch's announcement states.
"Other features of public debt are largely favourable," it adds. "The share of external debt is low, at 8% of GDP in 2019. Israel benefits from high financing flexibility, having deep and liquid local markets supported by the central bank's NIS50 billion (3.8% of GDP) bond buying programme, strong access to international capital markets, an active diaspora bond programme, and US government guarantees in the event of market disruption."
Published by Globes, Israel business news - en.globes.co.il - on April 23, 2020
© Copyright of Globes Publisher Itonut (1983) Ltd. 2020