Fitch Ratings on Thursday reaffirmed Israel’s A+ rating with a stable outlook, citing its “strong external finances and solid institutional strength.”
The credit ratings agency also noted Israel’s relatively high government debt to GDP ratio and security risks.
Israel’s economy contracted by 2.6 percent last year due to the pandemic, but is expected to grow by 5.1% this year and 5.7% in 2022. The economy stood up to pandemic shock relatively well due to Israel’s high-tech industries and successful vaccination campaign, the report said.
The agency predicted Israel’s budget deficit will decline from 11.6% of GDP in 2020 to 7% in 2021, as the economy rebounds from the worst of the pandemic, government support measures recede and the high-tech sector continues its strong performance.
Fitch said it expects the government to pass a budget, its first after over two years of political stalemate, which will further stabilize debt levels. It forecast a budget deficit of around 3% in 2023, after all pandemic support measures end.
The report noted fiscal risks including the government coalition’s razor-thin majority in the Knesset, its diverse membership, and security risks, including instability in Syria, tensions with Iran and potential violence with the Iran-backed Hezbollah terror group in Lebanon.
The fighting between Israel and Hamas in the spring did not have a significant adverse effect on Israel’s economy, although the fighting exposed ethnic fault lines within Israel, the report said.
It remains to be seen if the Abraham Accords, which formalized relationships between Israel and the United Arab Emirates, Bahrain and Sudan, will lessen the geopolitical risks facing Israel. Economic benefits, meanwhile, “are likely to be limited given the modest size of their economies compared with existing trade partners.”
Fitch said it expects major Israeli banks to remain durable despite some stresses caused by the pandemic, and that net income declines in Israel last year were less severe than in peer countries.
The report assumed regional conflicts will continue, that Israel will not achieve any significant peace breakthroughs with the Palestinians, and that there will not be a serious deterioration in Israel’s domestic security.
The A+ rating is not Fitch’s highest — the agency’s scale spans from AAA to D. An “A” rating denotes high credit quality with low risk of default, and a strong capacity for paying off financial commitments, but some vulnerability to adverse business or economic conditions.
Fitch, which is based in New York and London, is considered one of the three major credit rating agencies, along with Moody’s and Standard & Poor’s.