Jerusalem, 14 August, 2023 (TPS) — Fitch, one of the world’s top credit rating agencies, reaffirmed Israel’s A+ credit status on Monday, but warned that the government’s judicial overhaul initiative could have a negative impact.
“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 the Fitch report.
But the report cautioned that repercussions from the government’s efforts to enact contentious changes in the legal system remain a major uncertainty.
“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. Some countries that have passed major measures reducing institutional checks and balances have seen a significant weakening of World Bank governance indicators (WBGI), the variable with the highest weight in Fitch’s Sovereign Rating Model (SRM). Implications for Israel’s WBGIs are unclear. Fitch considers the current measures are unlikely to trigger a material exodus of talent and capital in the high-tech sector,” the report said.
In addition to the judicial overhaul, Fitch noted that “Some MKs and members of government have made proposals to weaken central bank independence but none has been implemented. While not our base case, a weakening of central bank independence would reduce the credibility of Israel’s policy-making.”
In response, Israeli Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich issued a joint statement praising the Israeli economy.
“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,” they said. “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.”
The governing coalition’s judicial reforms are deeply controversial. Legislation advancing through the Knesset would primarily alter the way judges are appointed and removed, give the Knesset the ability to override certain High Court rulings, restrict the ability of judges to apply standards of “reasonableness,” and change the way legal advisors are appointed to government ministries.
Supporters of the legal overhaul say they want to end years of judicial overreach while opponents describe the proposals as anti-democratic.
The Fitch report went on to forecast a growth of about 3.1% of GDP in 2023 and 3.0% in 2024 and a slowing of inflation. But it also projected the government’s budget deficit to grow to 4% of Israel’s GDP in 2025.