International credit ratings agency Fitch reaffirmed Israel’s ‘A+’ sovereign credit rating while giving the country’s economy a “stable” outlook. However, the firm did have some bad news for Israel too, specifically regarding the country’s current political turmoil surrounding a controversial government judicial reform plan.
And the reaffirmation means that Fitch did not raise Israel’s rating. This after the firm hinted in May that it would be amenable to raising the rating that it gives Israel should the government of Prime Minister Benjamin Netanyahu drop its planned controversial judicial reform program. While Netanyahu has hinted to foreign media – while speaking in English – that he is not going to push for the more drastic and contentious parts of the plan, he has yet to make any definitive comments on the matter to the Israeli public.
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“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,” said Fitch.
Fitch predicts that Israel’s economy will see growth of about 3.1% of GDP in 2023 and 3.0% in 2024. But this is below the Bank of Israel’s (BOI) estimate of potential at around 3.8% per year and after 6.4% in 2022. Fitch attributed this to, “base effects, slow global growth and tight monetary policy.”
On the judicial reforms, the firm stated, “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 government’s judicial reform plan would significantly curtail the power of Israel’s Supreme Court to nullify legislation passed by the Knesset and also limit the authority of Israel’s attorney general. Israel’s opposition charges this would harm Israel’s democracy thereby eroding foreign confidence in the country and hurting its economy.
Israel’s opposition leaders have described the reform plan as a Coup d’état and have been calling Israel’s Prime Minister a dictator for wanting to end judicial reform of government actions and new laws.
As a result, tens of thousands of people have been protesting just about every Saturday night since the judicial reforms were first announced a few months, even blocking major highways.
And because of all of this, some foreign investors have been scared away from dealing with the country dubbed Startup Nation and even a few Israeli firms have taken money out of the country. And some Israeli entrepreneurs are looking to take their Israeli talent with them abroad to countries like Cyprus that offer tax incentives to attract foreign investment.
However, Fitch does not see this as alarming for Israel’s economy stating, “Fitch considers the current measures are unlikely to trigger a material exodus of talent and capital in the high-tech sector.”
But Israel’s Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich ignored the warnings and only mentioned the positive parts of Fitch’s review.
In a joint statement they said, “The approval of Israel’s credit rating at the A+ level and leaving the forecast at ‘stable’ prove what we have been saying all along – Israel’s economy is strong, stable, and solid. Israel is good for business. Those who invest in Israel profit. When you look at the true data of the Israeli economy, you get a picture that is the opposite of what the news channels are trying to create night after night.”
