In a welcome development for Israel’s economic landscape, Fitch Ratings, a prominent global credit rating agency, has reaffirmed the country’s credit rating of A+. The decision was accompanied by a stable forecast, alleviating market concerns and prompting a sigh of relief across various sectors. This outcome not only defied early apprehensions of a potentially negative report but also positioned Israel in a more favorable light than projections by domestic financial bodies, such as the Bank of Israel and the Ministry of Finance.

Leading up to the announcement, there was growing speculation about potential challenges to Israel’s credit rating, even among the most optimistic observers. However, the meticulous evaluation carried out by Fitch presented a relatively optimistic stance, crediting Israel’s economic performance and providing insights into their reasoning.

A significant factor in Fitch’s decision-making process was their relatively lenient perspective on concerns tied to legal reforms underway in Israel. Contrary to some predictions, Fitch’s analysts discerned that the reforms wouldn’t undermine key institutions in the foreseeable future, avoiding negative repercussions for the economy. The announcement echoed this sentiment, suggesting that any negative impact would arise if the reforms led to adverse policy outcomes or sustained negative investor sentiment, which Fitch currently considers unlikely.

Notably, Fitch acknowledged that various proposals had emerged with the potential to compromise the independence of the Bank of Israel, yet none of these propositions came to fruition. This underscores Fitch’s assessment that the broader effects of the legal reforms remain uncertain and inconsequential in the immediate future. The agency also recognized the potential for damage to public morale due to internal crises, which could hamper private consumption and investments. However, thus far, these concerns have not materialized.

Israel’s positive macroeconomic indicators contributed significantly to Fitch’s decision. Fitch projected a government deficit of 1.6% for the current year and 2.8% for the following year. These estimates contrasted with earlier predictions of a possible deficit exceeding 4% due to decreased tax revenues. Furthermore, Fitch anticipated a growth rate of 3.1% for the current year and 3% for the subsequent year. While these projections were more optimistic than those of some other financial institutions, such as S&P, they aligned closely with the Bank of Israel’s expectations.

Another highlight in Israel’s favor was its declining debt-to-GDP ratio, which Fitch foresees stabilizing at around 59% by the end of 2023. The agency credited Israel’s robust financing capacity and diverse investor base for this achievement. While Fitch warned of the potential for an upward debt trend in the case of structural budgetary expansion beyond 2024, the current ratio decline emphasizes the country’s commitment to fiscal responsibility.

However, the relatively buoyant macro data might have suggested to some that Fitch would consider raising Israel’s rating forecast. The hesitance in doing so is attributed, at least in part, to the ongoing debate around the legal reforms. Despite this, Fitch’s assessment diverged from several analyses that attributed a contraction in investments in Israeli high-tech to the legal reform uncertainty. Instead, Fitch emphasized global trends and cited the resilience of the high-tech sector, which, despite some challenges, was not expected to witness a substantial outflow of talent or capital.

While Fitch’s report largely painted an optimistic picture of Israel’s economic landscape, some cautionary sentences alluded to potential pitfalls. The agency pointed out instances in other countries where reforms affecting institutional checks and balances led to negative consequences for governance indicators. While Fitch did not explicitly name Poland or Hungary, the reference was clear. This highlighted the agency’s willingness to reconsider its assessment if the legal reform led to unforeseen societal or economic detriments.

In conclusion, Fitch’s decision to maintain Israel’s credit rating and stable forecast showcases the country’s resilience in the face of challenges. Strong macroeconomic indicators, a decreasing debt-to-GDP ratio, and the ability to navigate reforms with a minimal impact on institutions have contributed to this outcome. As the nation awaits assessments from other credit rating agencies, Israel can look to this outcome with cautious optimism, noting that continued economic stability will be pivotal in maintaining the credit rating in the future.

Main photo: The Fitch Ratings logo is seen at their offices in London, UK, REUTERS/Reinhard Krause