Last week, international credit rating agency Fitch released a fairly optimistic report on Israel, and left its sovereign rating for the country unchanged at A+. The rating outlook was also left unchanged, at "Stable". This was despite earlier fears that Israel’s rating might be damaged, or at least that Fitch might have some severe things to say.
The firm did not come into line with those who claim that Israel’s high-tech sector will be badly hit by the far-reaching changes that the government is promoting in the country’s legal system. Its analysis is that the decline in investment in the sector in Israel is part of a global trend. Fitch is also the only one of the three major rating agencies not to have published an unscheduled report after the Knesset passed the law abolishing the reasonableness standard in judicial review of decisions by the government and government ministers.
In an interview with "Bloomberg", Fitch’s lead analyst on Israel, Cedric Berry, explained Fitch’s optimism and its less stringent approach in comparison with the other international rating agencies, S&P and Moody’s. "Even if Israel’s government lasts four years, it’s unlikely that a similar coalition would be formed afterward, so it would take a very strong reform drive to inflict a significant amount of damage, and we don’t think that’s where the government is headed," Berry said.
On Israel’s high-tech sector, Berry said, "Even if there is a bit of movement outwards of talent and capital, there is still quite a lot of activity that will remain in Israel and be sufficient to drive the economy."
Berry also commented on the sharp depreciation of the shekel since the beginning of the year, by about 8% against the US dollar, saying that currencies and stock markets "tend to react more strongly than economic fundamentals," and that it was the fundamentals that Fitch considered in its ratings.
"In our view, we are likely to see new investments in Israel when the global trends turn," Berry said, adding, "The key message here is that it’s not doomsday." For Israel’s credit rating to be damaged, we would have to see "a significant exodus of both talent and capital and that’s not something that we anticipate at this point," he told "Bloomberg".
All the same, Fitch did mention developments that could be warning signals for the future. One of them is "a massive change in the way judges are appointed with a very political agenda." In the report itself, Fitch mentioned that "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," and that the implications of the changes currently being proposed for Israel’s WBGIs were "unclear".
Simply put, if it turns out that the judicial overhaul leads to damage that, at present, Fitch does not expect, it will not hesitate to change its approach. "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," last week’s report stated.
Fitch also warned of developments on the macro-economic front that could lead to a review of its assessment, such as a permanent rise in the ratio of government debt to GDP.
Israel has managed to overcome the Fitch hurdle, but the next credit rating challenges could be more difficult. S&P and Moody’s are due to publish updates on Israel’s sovereign rating within the next few months. Moody’s will be first, on September 13. In its last update, it downgraded Israel’s credit rating outlook from "Positive" to "Stable", and issued a sharp warning about the possible consequences of the judicial overhaul. On October 10, it will the turn of S&P, which in its last review sufficed with warnings only and took no rating action.
Published by Globes, Israel business news - en.globes.co.il - on August 21, 2023.
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