Global financial rankings firm Fitch Ratings has given Israel a strong ‘A+’ rating. This is, in part, due to how much resilience Israel has shown during the Covid crisis.
Israel has been given an ‘A+’ rating by Fitch every half year going back to November 2016. Israel has had at least an ‘A-‘ going back to 1995.
Fitch offers a wide range of ratings from ’AAA’ all the way down to ‘D’. Its ‘A’ rating is the third-highest after ‘AA’ and ‘AAA.’ ‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
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According to Fitch, Israel’s ‘A+’ rating balances a “diversified, high value-added economy, which proved resilient to the Covid-19 pandemic, strong external finances and solid institutional strength against a high government debt/GDP ratio and elevated security risks.” This means that while Israel has a debt that is currently high relative to its Gross Domestic Product, the country still has strong institutions and shows potential for growth. The high debt is understandable due to the Covid-19 shutdowns.
The Coronavirus crisis caused the Israeli economy to contract by 2.6% in 2020. Restrictions imposed from 2Q20 and are forecast to grow by 5.1% and 5.7% in 2021 and 2022, respectively. “The economy has been more resilient to the pandemic shock than many rating peers, reflecting the strong performance of high-tech industries and the early and fast progress in vaccination,” said Fitch. Fitch’s forecast implies that Israel will outperform the ‘A’ median for GDP growth for each year from 2021 to 2023.
Fitch forecasts a budget deficit of around 7% of GDP in 2021, down from 11.6% in 2020, mainly due to the economic rebound, the gradual withdrawal of pandemic-related support measures and buoyant revenues from high-tech sectors. But they also expect Israel’s budget deficit to fall in 2022 to close to 5% of GDP and around 3% in 2023 because by then all the extra spending on Covid pandemic support measures will have ended. Fitch expects the general government debt to GDP ratio to peak at 74% in 2021 and remains broadly stable in 2022 and 2023.
So what was the bad news for Israel?
Fitch sees some risks, specifically in Israel’s current political instability. Its current government holds just a one-seat majority in the Knesset and its stability is in constant doubt. And because Israel has had four different elections since April 2019, and only a “caretaker” government during that time, the country has not passed a full budget since the end of 2018.
Then there is the constant risk of military conflict, whether with Hamas, Hezbollah or Syria. And tensions continue to mount between Israel and Iran.
But this has been tempered by the Abraham Accords which brought peace treaties between Israel and the Arab Gulf states of Bahrain and the UAE. The Accords have already shown significant dividends in new business dealings between the countries.
Fitch also expects the ratings of major Israeli banks to remain resilient to the economic pressure from the pandemic. The average non-performing loan ratio for the five largest Israeli banks was 1.1% at end-2020, unchanged from the previous year.
