After cutting the US credit rating last week, credit rating agency Fitch is set to announce Israel's annual rating and credit outlook. Even economists who had been confident that there would be no change in Israel's rating or outlook are now sounding more circumspect. Israel's strong macroeconomic data still constitutes an important factor in favor of maintaining the rating, but almost everyone agrees that the risks have increased due to the recent political events surrounding the judicial reform.
Despite everything the consensus remains that Fitch will not take any actual measures to cut Israel's rating or its outlook. Those familiar with the three major international rating agencies note the differences in their approaches. While S&P, and even more so Moody's have sharply attacked the judicial overhaul led by the government and are following every development, Fitch has so far put most of the weight on economic indicators.
The scenario warned against in May has been realized
In a review published by Fitch about Israel in May, the agency spoke positively about the country's debt management policy and favorably noted the low deficit targets set by the government (which so far are not exactly being realized, with a deficit already in July almost reaching the Treasury's annual forecast).
Fitch attached to the review a warning against the consequences of the judicial reform, which was less severe than those released by the two rival rating agencies. "Judicial reform has the potential to have a negative impact on Israel's credit profile if it weakens governance indicators, or if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment," Fitch wrote, one month after Moody's had lowered Israel's credit outlook from positive to stable.
Fitch's credit rating and outlook for Israel are currently the equivalent to Moody's at A+ with a stable outlook but lower than that of S&P, which is AA- with a stable outlook. Since 2016, there has been no change in Fitch's Israel credit rating.
If Fitch decides to cut Israel's rating outlook this time, it will actually give Israel the lowest credit outlook of the three agencies. Such a decision will come as a surprise, but Fitch already surprised earlier this month when it downgraded the perfect credit rating that the US has historically enjoyed.
Fitch will be the first of the three major rating agencies to publish Israel's annual rating announcement, with the two other agencies following suit in the coming months. A Fitch delegation visited Israel last month for a series of meetings with Ministry of Finance official and other organizations in the country, in preparation for the rating decision.
"The balance sheet factors in the economy are still positive"
An Israeli official, who met with Fitch's analysts, told "Globes" that he believes that the rating agency will make do with warnings about the uncertainty in Israel and will not lower the rating outlook. "The balance sheet factors in Israel's economy are still good and positive."
A senior market source estimates the odds that Fitch will lower the rating outlook is 30%, compared with 70% that it will reaffirm the existing rating and outlook. Another market source prices the risk of downgrading the rating outlook a little higher at 50%-50%.
The only thing that everyone agrees on is that the text in the report will be harsh and full of warnings about the consequences of the judicial overhaul, with a more severe tone than used by Fitch so far. In Fitch's previous reference to the issue, at the end of May, the rating agency warned against a scenario that has since been realized with the abolishment of the Supreme Court's right to disqualify government decisions as unreasonable, without any broad consensus. That review was written when Fitch was still waiting for agreements to be reached between the coalition and the opposition in the talks under the auspices of President Herzog, which finally broke down.
Published by Globes, Israel business news - en.globes.co.il - on August 10, 2023.
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