Leading rating agency Moody’s upgraded Israel’s economic outlook from stable to positive on Friday, affirming the country’s credit rating as A1.
Moody’s cited Israel’s strong economic growth and the government’s “reform agenda” on challenges such as labor productivity and participation of under-represented communities in the workforce. Israel last earned a “positive” outlook from Moody’s in July 2018, which was later downgraded to “stable” in April 2020 when the COVID-19 pandemic started gaining pace in the country.
In 2021, Israel’s economy grew by 8.1%, surpassing forecasts and marking the highest financial growth rate recorded in Israel in 21 years, according to data published in February by the Central Bureau of Statistics.
According to the data, the fourth fiscal quarter of 2021 saw a staggering 16.6% growth in GDP, bringing the yearly average to 8.1%, the highest since 2000, when Israel’s growth rate stood at 8.4%.
The Bank of Israel had estimated that the growth rate would reach 6.5% in 2021. The Finance Ministry’s more optimistic estimations pointed to a 7.1% growth. The OECD in December said that the Israeli economy had beat all forecasts to rebound strongly in 2021, citing the country’s ongoing booster vaccination campaign, a recovering labor market, and a booming local tech sector.
The country’s annual inflation rate hit 3.5% in February, the highest since 2011, up from 3.1% in January, and above the central bank’s target of between 1%-3%. The Bank of Israel is expected to announce a hike in interest rates next week to battle inflation.
Moody’s said that in 2021, Israel’s “fiscal metrics improved faster than expected, helped by buoyant tax revenues against the backdrop of solid and resilient growth, as well as the near-complete tapering of COVID-related expenditures.”
The agency said that the government coalition, led by Prime Minister Naftali Benett, has been “more stable and cohesive than initially thought” but acknowledged that it has now lost its small majority, due to the defection of coalition whip Idit Silman of the premier’s Yamina party. Moody’s said “it remains to be seen” whether the government “will remain in power to implement its comprehensive reform agenda alongside prudent fiscal policies.”
The government has sought to implement reforms meant to raise “productivity growth by improving physical infrastructure as well as human capital and skill levels,” Moody’s said, but the country still faces significant challenges. Israel’s low productivity (estimated by the OECD at 35% lower than the organization’s best performers) is driven by the disparity between the tech sector and more traditional sectors, heavily regulated industries such as manufacturing, and widening socioeconomic gaps.
The agency said the affirmation of the A1 rating balances the economy’s solid growth prospects and resilience with the government’s relatively high public debt burden. Moody’s rating scale runs from Aaa (the highest) to C (the lowest); an A1 grade falls in the upper portion of the medium grades.
Israel’s economy has been resilient in the face of repeated internal and external shocks, Moody’s said, as unemployment levels inch toward pre-COVID levels.
Meanwhile, Israel’s exposure to Russia’s war on Ukraine is “very limited,” the agency said, “also thanks to the country’s energy independence.”
Finance Minister Avigdor Liberman said in a statement Saturday that he welcomes “the decision of rating company Moody’s to raise Israel’s rating forecast,” adding that it came following “the highest growth figures in two decades and an unemployment rate that returned to its pre-corona[virus] crisis level.”
“This was made possible thanks to a responsible fiscal policy that also provides an appropriate response to the needs of the economy and promotes structural reforms that constitute engines of growth for the coming years,” said Liberman.
In February, Fitch Ratings reaffirmed Israel’s A+ rating with a stable outlook, noting the country’s strong economic performance and a reduction of the fiscal deficit in 2021.
Times of Israel staff contributed to this report