Israel's credit rating may rise, according to the credit rating agency Fitch, which published a review for investors regarding the Israeli economy. However, the agency is hinting that the promotion of the legal reform may harm such a move , despite the expectation of good economic data. The review comes following the approval of the state budget by the Knesset and despite the return to a deficit budget, Fitch estimates that the deficit will be lower than before the outbreak of the Corona epidemic.
In the review, titled "Strong economic growth is the key to paving Israel's debt", the analysts say that the deficit in the next three years will grow. The estimates are that in 2023 the deficit will be 1.5%, in 2024 it will rise to 2.3% and the following year it will be 2.8%. This assessment is in line with the forecasts according to which the company left Israel's credit rating in March, which stands at A+.
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Despite the increase in the deficit, Fitch estimates that Israel's debt/GDP ratio will continue to decrease, mainly due to strong growth that will average 6.9% over the next three years. In March, Fitch estimated that the government's debt-to-product ratio would reach 57.9% in 2024 – a decrease of almost 4 percent from 2022 – thus approaching the level of countries with a credit rating of AA – which may lead to a rating increase – although in combination with other factors such as governmental stability.
Finance Minister Smotritz after the approval of the state budget: "We have received the tools, we are starting to implement them" (Photo: Knesset Channel)
Fitch predicts an increase in government spending in the medium term, in light of population growth and rising inflation, and mentions that the balance of power in the current government limits the ability to limit spending. In light of this, the rating agency warns that if revenues are below expectations, for example if growth is not as high as expected, the result could be a larger deficit and harm Israel's debt track.
Fitch also says that the transfer of the state budget is a positive thing for the government's stability, but despite this, Israel continues to experience governmental and social tensions, and warns that the promotion of various policies by the government could escalate the tension and affect the rating – a clear hint for the advancement of legal reform.
As you may recall, about three months ago, the agency estimated that the proposed reform has the potential to have a third effect on Israel's credit profile if the weakening of balances in the government – that is, damage to the judicial system – will cause a third emotion among investors.
Regarding the state budget itself, Fitch said that the government focused on investing in education and infrastructure, but according to the review, the quality of the investment is also important. "We believe that there is still a risk of a lack of infrastructure and human capital that could be an obstacle to the ability of Israel's economy to grow in the long term if it is not effectively exploited," the review states.
