Standard and Poors (S&P), one of the world’s top credit rating agencies has decided to preserve Israel’s already high credit rating at AA-. The firm cited a number of reasons for its decision.
The announcement comes just as Israel is seeing its highest rate of inflation in years, in a country where people already suffer from a relatively high cost of living. But, at the same time, Israel is also seeing very high growth and expects this growth to continue through the end of 2022.
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S&P acknowledges that security and political risks in Israel have escalated sharply in the last few days, tied to a flare-up of hostilities with Hamas. But so far Israel has avoided entering into another full scale conflict with Hamas such as last year’s Operation Guardians of the Wall. And, it should also be noted, the flare up that occurred during the Mulim holy month of Ramadan did not do anything to Israel’s strengthening economic and business ties with the United Arab Emirates and Bahrain.
Then there was the worldwide Covid crisis. S&P explained that Israel had a very effective and swift vaccination campaign against COVID-19. So it is coming out of the crisis with fewer long term problems than some countries. This, along with strong technology sector performance, and rising gas exports, says S&P, should still underpin solid GDP growth of 5.0% in 2021.
While the pandemic markedly deteriorated Israel’s public finances, S&P say that risks are likely to be mitigated by its favorable debt structure, alongside its credible monetary policy and strong balance of payments.
“The stable outlook balances the elevated political and security uncertainty, and pandemic-induced deterioration of Israel’s fiscal position, against the country’s persistently resilient economy and strong balance of payments,” said S&P. “We forecast that Israel’s net external asset position will amount to just under 50% of GDP over the next two years, providing the economy with substantial buffers to withstand the current tensions.”
Standard and Poors explained that it could actually increase Israel’s rating, depending on several factors. These include a significant reduction in the current political and security risks and if the country performs fiscally much better than they have anticipated.
On the other hand, Israel’s rating could also decline. This could happen should security and political risks tied to the current flare-up are continue or get worse. Also, with Covid anything is possible so should a new strain develp and force another shutdown it obviously would affect Israel’s economy negatively.
“Political and security risks have once again escalated sharply in Israel in recent days. While security risks have been a long-standing feature of Israel’s credit profile, constraining the ratings, the latest round of confrontation involves a significant escalation,” explained S&P.
“Israel’s wealthy and resilient economy, its net external asset position, and the benefits that accrue from flexible monetary settings and a relatively deep pool of domestic savings are credit strengths,” explained S&P. “In our view, these characteristics should also help cushion the pandemic-related deterioration in its fiscal position. We consider that Israel’s fiscal metrics could be adversely affected by the current military escalation, but these are difficult to quantify at the moment.”