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S&P reaffirms Israel’s AA- rating, citing ‘wealthy, resilient’ economy

Agency forecasts Israeli GDP growth of 6% this year, but just 2% in 2023, given global economic trends

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

People wait in line at a polling station to cast their ballots, during Israeli elections, in Tel Aviv, Israel, November 1, 2022. (AP/Oren Ziv)
People wait in line at a polling station to cast their ballots, during Israeli elections, in Tel Aviv, Israel, November 1, 2022. (AP/Oren Ziv)

Credit rating agency Standard & Poor’s (S&P) has kept Israel’s favorable rating unchanged at AA- with a “stable” outlook, in its newest analysis published over the weekend.

The agency forecast that Israel’s economy will have grown by a strong six percent this year, but that global economic trends would hamper growth in 2023, and Israel’s GDP will grow by an estimated 2% next year.

In updated projections last month, the Bank of Israel said it forecasts Israel’s GDP growth at 6% in 2022, and 3% in 2023, as the country — like everywhere — continues to grapple with inflation. The bank has hiked benchmark interest rates as inflation in Israel has reached 4.6% over the past 12 months, according to October data, down from 5.2% calculated in August but still well above the bank’s upper range of 3% projected in January.

In its analysis, S&P praised Israel’s “wealthy and resilient economy” as a rationale for its favorable credit rating but said such assessments “remain constrained by significant domestic and regional political and security risks.”

The agency welcomed the results of Israel’s most recent elections on November 1, which produced a bloc right, far-right, and religious parties with 64 seats of the Knesset’s 120 but noted that “domestic political volatility could persist if the surge in support for far-right parties leads to higher tensions, including in the West Bank.”

The incoming coalition headed by the Likud’s Benjamin Netanyahu includes the far-right Religious Zionism faction, and ultra-Orthodox parties Shas and United Torah Judaism. Netanyahu was given the mandate on Sunday to form the next government with these coalition partners.

A man and his son vote during Israeli elections in Tel Aviv, Israel, November 1, 2022. (AP/Oded Balilty)

S&P said that the “political shift to the right is unlikely to affect economic performance in the near future, which has been largely uncorrelated with political cycles in recent years,” but that “domestic political volatility could persist if the surge in support for far-right parties leads to higher tensions, including in the West Bank.”

While noting positive recent developments like the signing of the Abraham Accords that normalized ties and grew economic relations between Israel, the United Arab Emirates, Bahrain, and Morocco, and the maritime border deal with Lebanon, the agency said that regional political risks were still “elevated” and that “escalation of hostilities between Israeli security forces, Hamas, and other groups remains a
possibility.”

Nonetheless, Israel’s economy has proved resilient in the face of uncertainty and instability in recent years. The economy, driven by high value-added IT-related service exports, registered only a mild contraction of 1.9% in real terms in 2020 at the onset of the COVID-19 pandemic, and then grew by a strong 8.6% in 2021, S&P said.

In 2021, exports of “services” — a loose term that includes Israeli technology services like software and various research and development (R&D) solutions — exceeded exports of goods for the first time, with 52% for services and 48% for goods. Israel’s tech sector experienced a bumper year for investments and exits (defined as merger and acquisition deals or initial public offerings of shares).

S&P said it forecast economic growth of 6% in 2022 with all the key expenditure components such as consumption, investment, and exports to expand but that 2023 growth will slow as the near-term risks increase.

Israel’s main trading partners are the US and European countries, where the economic forecasts are quite bleak. The US economy is forecast to grow by just 0.2% in 2013, and the eurozone by just 0.3% as some countries fall into recession, S&P said.

European Commissioner for Economy Paolo Gentiloni speaks during a media briefing after a meeting of eurogroup finance ministers at the European Council building in Brussels on December 6, 2021. The European Commission’s autumn forecast released November 11, 2022, predicts falling economic output in the last three months of this year and the first months of 2023. (AP/Geert Vanden Wijngaert)

As such, the agency expects “lower corporate investments from the countries that purchase Israeli services, which will, in turn, weigh on the small and open Israeli economy.”

And while economic growth will stagnate in 2023, S&P expects a rebound in 2024 and 2025.

Domestically, S&P said it expects household budgets to “suffer from higher inflation, the tightening of Israel’s monetary policy, and the effect of rapid house price growth on housing affordability.”

Housing prices are up 19% from last year and the Consumer Price Index — a measure of inflation that tracks the average cost of household goods like food, clothing, and transportation — has been steadily increasing.

“We expect the government may be under pressure to adopt additional spending measures that would soften the effect on living standards in the coming months,” the agency said.

Outgoing Finance Minister Avigdor Liberman welcomed the S&P report in a statement and said it was a “result of a responsible fiscal policy” that showcased “the strength of the Israeli economy.”

S&P last affirmed Israel’s credit rating in May. A month earlier, another leading agency, Moody’s, upgraded Israel’s economic outlook from stable to positive and affirmed its credit rating as A1.

In February, Fitch Ratings reaffirmed Israel’s A+ rating with a stable outlook, also noting the country’s strong economic performance and a reduction of the fiscal deficit in 2021.

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