Fitch reiterates Israel’s A+ rating, citing diversified economy, strong finances

Fitch Ratings has affirmed Israel’s A+ rating with a stable outlook, citing its “strong external finances,” diversified economy and “solid institutional debt.”

This balances against the nation’s high government debt-to-GDP ratio, which is higher than the median of other A category nations, and the ongoing political uncertainty and the security risks, the rating company said in a statement on Wednesday.

“Israel’s public finances have deteriorated significantly due to the pandemic, and ongoing political volatility complicates the prospects for fiscal adjustment,” Fitch said.

Government debt/GDP is forecast to peak in 2023 at about 80%, from 76% in 2020 and 60% in 2019. This is “well above the estimated 2020 median of around 58% for ‘A’ category sovereigns.”

However, “financing conditions have remained healthy,” with liquidity in the local markets supported by the central bank’s bond buying program, the authors said.

Pandemic-related spending pushed Israel’s government deficit to a record high of 11.7% in 2020, and Fitch said it expects the deficit to remain high also in 2021, at about 9% of GDP.

A government budget is unlikely to be adopted before the third quarter of 2021, after Israel holds its fourth election in two years in March. Until then, spending will be constrained by a limit of 1/12th of the 2019 budget each month, to which COVID-19 related cash expenditure of about 3% of GDP, adopted in 2020, will be added.

“Further ad-hoc support packages are possible,” Fitch said, and because of the political instability the agency doesn’t expect significant consolidation measures in 2021.

“We estimate that the vast majority of Covid-19-related spending commitments will be phased out by 2022,” Fitch said, forecasting the budget deficit to narrow to 4.3% of GDP in 2022.

There are, however, “significant risks to this forecast, given the highly polarized political context, which could preclude the formation of a new government or prevent the adoption of fiscal consolidation measures,” Fitch said.

A “persistent rise in the level of government debt/GDP, reflecting the absence of sufficient consolidation measures, could be a factor that could lead to a negative rating action” or a downgrade, the report said.

After a contraction of 3.9% in GDP in 2020, the economy is expected to grow by 5.4% in 2021 and 4.1% in 2022, settling “at a trend growth rate of close to 3%.” This is based on a scenario which assumes that economic restrictions will be phased out, a vaccination program will continue at a rapid pace in the first half of the year and limited international tourism will resume in the second half of the year.

“There are risks to the forecast given possible new waves of infections and the timing and effectiveness of the vaccine rollout, both in Israel and globally,” Fitch said. “Israel’s diversified and high value-added economy proved resilient to recurring restrictions, with most of the increase in unemployment concentrated in low value-added sectors, such as tourism, retail and entertainment. The revival of these sectors will support the recovery.”

It remains to be seen if the Abraham Accords, which formalized the relationships between Israel and the UAE, Bahrain and Sudan, will lessen the geopolitical risks facing Israel. Economic benefits, meanwhile, “are likely to be limited given the modest size of their economies compared with existing trade partners.”

Fitch said it does not assume any breakthrough in the peace process with the Palestinians or a prolonged serious deterioration in domestic security conditions.

In November, Standard & Poor’s affirmed Israel’s position at a relatively high AA- rating, with a stable outlook, while in October Moody’s also left Israel’s credit rating unchanged at A1, expressing confidence in the country’s economy despite two punishing coronavirus lockdowns and a “polarized political system.”