US credit rating agency Fitch “affirmed” on Monday that Israel’s outlook is “stable” and the country’s A+ credit rating is unchanged.
“Israel’s ‘A+’ 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,” the agency said in its announcement.
“The government’s initial judicial overhaul package has been watered down but remains highly controversial and faces strong civil society and political opposition,” Fitch noted in its comments.
“Parliament has already passed legislation that stops the Supreme Court from striking down legislation on the basis of ‘reasonableness’. The government also wants to change the process for appointments to the committee that selects judges, but it has indicated it may no longer seek to give an automatic majority in the appointment committee to the ruling coalition and has dropped an initiative that would allow parliament to override Supreme Court decisions against legislation.
“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 agency cautioned.
“Some countries that have passed major measures reducing institutional checks and balances have seen a significant weakening of World Bank governance indicators (WBGI), the variable with the highest weight in Fitch’s Sovereign Rating Model (SRM). Implications for Israel’s WBGIs are unclear.”
However, the agency said, “Fitch considers the current measures are unlikely to trigger a material exodus of talent and capital in the high-tech sector.”
“The scope for additional measures that could impact the credit profile is also unclear. Some MKs and members of government have made proposals to weaken central bank independence, but none has been implemented.
“While not our base case, a weakening of central bank independence would reduce the credibility of Israel’s policy-making,” the agency warned.
Fitch predicted a slowdown in the economy, due in part to the larger slowdown worldwide, but added that Israel’s high tech and defense exports will likely help to keep Israel’s strong economy stable.
“We project growth of about 3.1 percent of GDP in 2023 and 3.0 percent in 2024, below the Bank of Israel’s (BOI) estimate of potential at around 3.8 percent per year and after 6.4 percent in 2022, due to base effects, slow global growth and tight monetary policy,” the agency noted.
“Our base case assumes limited impact from the judicial changes beyond the protests’ impact on consumption and a delay in some capital investment decisions, although risks of a greater impact remain.
“Growth will be supported by continued exports from the high tech and the defense industries as well as strong population growth.”
