Fitch reaffirms Israel’s A+ rating, citing state budget approval

Ratings agency calls Knesset passage of budget an ‘important milestone’ that reduces political uncertainty and potential risks to public finances

Ricky Ben-David is The Times of Israel’s Startups and Business editor and reporter.

A stock market ticker screen in the empty lobby of the Tel Aviv Stock Exchange, on March 15, 2020. (Flash90)
A stock market ticker screen in the empty lobby of the Tel Aviv Stock Exchange, on March 15, 2020. (Flash90)

Fitch Ratings on Thursday reaffirmed Israel’s A+ rating with a stable outlook, citing the Knesset’s passage of the 2021-2022 state budget last week as “an important milestone” for Israel’s new government that will reduce “political uncertainty and potential risks to the public finances, affirming the government’s capacity to advance legislation.”

The NIS 609 billion ($194 billion) spending plan for 2021 and the NIS 562.9 billion ($180 billion) plan for 2022 were part of the first budget Israel has passed since 2018, due to a prolonged political deadlock that saw successive governments fall before they could bring a proposal to the Knesset.

The credit ratings agency also noted the approval of the Arrangements Law for 2021 and 2022, which determines how the allocation of funds will be implemented, and includes key reforms such as the easing of trade and import barriers, sweeping changes to the kashrut establishment and the agriculture industry, significant banking reforms, deregulation, and measures that would help the Israeli economy transition to renewable energy sources.

The new budget, noted Fitch Ratings, puts the deficit target at 6.8 percent of GDP in 2021 and 3.9% in 2022, down from a peak of 11.4% in 2020 due to the COVID-19 pandemic.

The credit agency said the improvement in the public finances in 2021 has been “driven by the strong economic rebound, the gradual withdrawal of the pandemic support measures, and particularly buoyant fiscal revenue from high-tech sectors.”

The official deficit targets represented a slightly faster pace of fiscal consolidation than Fitch Ratings’ assumptions in July for deficits of 7.3% and 5.2% of GDP, respectively, in 2021 and 2022.

Fitch said that though some risks to the economy have receded, the agency still views the budget outcome for 2022 as “vulnerable to fiscal slippage, particularly if the economy were to experience another shock, for example due to global supply-chain disruptions or higher energy prices.”

Israel had five-year average GDP growth of 3.7% before the pandemic, roughly in line with the 4% median for ‘A’ rated countries, Fitch said.

Finance Minister Avigdor Liberman said in response to the rating that “the approval of the state budget for the first time since 2018 ensures the stability of the government for the coming years, and the Arrangements Law includes structural reforms that will support sustainable growth while maintaining fiscal frameworks.”

The A+ rating is not Fitch’s highest — the agency’s scale spans from AAA to D. An “A” rating denotes high credit quality with low risk of default, and a strong capacity for paying off financial commitments, but with some vulnerabilities due to adverse business or economic conditions.

Fitch, which is based in New York and London, is considered one of the three major credit rating agencies, along with Moody’s and Standard & Poor’s.

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