Standard & Poor’s, the provider of independent credit ratings, said over the weekend it was reaffirming Israel’s credit rating at third highest investment grade with a positive outlook, saying it expects Israel’s economy to stay strong.
The ratings firm held Israel at A+/A-1. The ratings are an indication of the credit-worthiness of a nation that issues debt and how likely it is to repay the debt.
“The ratings are supported by Israel’s prosperous and diverse economy, strong external balance sheet, and flexible monetary framework,” S&P said in the report.
The report said that “Israel’s economy remains prosperous and diverse,” with its manufacturing and services sectors, especially in the field of information technology, providing high added value to the economy.
“The information and communication sector contribute almost 10% of the gross value added, and scientific and technical activities about 3%. This is underpinned by high expenditure on research and development, exceeding 4% of GDP on average, the highest among member countries of the Organization for Economic Cooperation and Development,” the report said.
The authors forecast Israel’s economy will expand by about 3.1 percent on average in the years 2018-2021, with economic growth stemming from private consumption, corporate investments and strong exports of services, all supported by an easing monetary policy.
“We note that the projected growth comes on top of Israel’s already remarkable economic performance since the global financial crisis started in 2008. For example, GDP in U.S. dollar terms has increased by 50% compared with that in 2010, and the unemployment rate is at historical lows.”
S&P expects the unemployment rate to drop to 4.0 percent in 2019 though 2021, from 4.2% this year.
The report said it expects the 2019 budget to pass smoothly. Yet, it believes that “coalition’s diverse composition could constrain the government’s capacity to address longer-term structural issues of the economy and society. These issues include excessive red tape, infrastructure gaps, weak labor market participation, poor skills of some social groups (mainly Haredi men and Arab Israeli women), and housing-related issues.”
Geopolitical risk, however persists. “Major outbreaks of violence toward the Palestinians could not only inflict social and economic costs, but also lead to a backlash from the international community,” the report said.
On Israel’s northern border, the conflict in Syria and Iraq, as well as potential tensions with Hezbollah, “pose a medium-term security threat,” the report said. And even if the US administration seems committed to support Israel in case security risks escalate, “any significant armed conflict could have a negative impact on the ratings, since it would likely deter investment, weaken the economy’s growth potential, or result in budgetary pressures.”
One of the key challenges to monetary policy continues to be rising house prices, the report said. Real house prices have increased by over 100% since the end of 2007. Government efforts to increase the supply of land for development and other steps it has taken to address the housing shortage “might take time.”