Fitch again affirms Israel’s A+ credit rating, warns of overhaul’s potential damage

Fitch Ratings affirms Israel’s A+ credit rating with a stable outlook, as it did in March, while continuing to warn of the prospect of the government advancing more parts of its judicial overhaul.

In its report, Fitch says the high rating “balances a diversified, resilient and high value-added economy and strong external finances against a relatively high government debt/GDP ratio, ongoing security risks and a record of unstable governments that has hindered policymaking.”

Echoing comments made by Prime Minister Benjamin Netanyahu in international interviews, Fitch says “the government’s initial judicial overhaul package has been watered down but remains highly controversial and faces strong civil society and political opposition.”

It notes the passage of the reasonableness law and Netanyahu’s stated plan to change the makeup of the Judicial Selection Committee — while noting this plan may no longer aim to give the coalition complete control over the selection of judges — and the shelving of the plan to pass an “override clause.”

“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,” the report notes.

But on a more positive note, it adds: “Fitch considers the current measures are unlikely to trigger a material exodus of talent and capital in the high-tech sector.” This is despite growing talk of a brain drain and relocations, trends that have yet to materialize.

Fitch projects “growth of about 3.1% of GDP in 2023 and 3.0% in 2024, below the Bank of Israel’s (BOI) estimate of potential at around 3.8% per year and after 6.4% in 2022, due to base effects, slow global growth and tight monetary policy.”

Regarding Israel’s mounting inflation, Fitch predicts it to “continue to slow until the end of the year as import prices drop and endogenous inflation slows with a moderation of consumption and investment.”