Fitch Rating Inc. affirmed Israel's A+ credit rating in a report published on Friday.
Fitch first raised Israel's rating from A to A+ in November 16, and has not lowered it since.
"Israel's 'A+' rating balances a diversified, high value-added economy, which proved resilient to the COVID-19 pandemic, strong external finances and solid institutional strength," Fitch's report read.
"The Israeli economy contracted by 2.6% in 2020 due to the COVID-19-related restrictions imposed from 2Q20 [2020's second quarter] and is forecast to grow by 5.1% and 5.7% in 2021 and 2022, respectively," the report stated. "The economy has been more resilient to the pandemic shock than many rating peers, reflecting the strong performance of high-tech industries and the early and fast progress in vaccination."
"Fitch forecasts a budget deficit of around 7% of GDP in 2021, down from 11.6% in 2020, mainly due to the economic rebound, the gradual withdrawal of pandemic-related support measures and buoyant revenues from high-tech sectors," the report read. "The new government is preparing the first regular budget in three years covering the end of 2021 and 2022 and the final vote on it is scheduled for November. Fitch expects that the government will be able to adopt a full budget by November 2021, consistent with its commitment to stabilize the public debt/GDP ratio in 2022."
Despite the positive forecasts, the report also mentioned the unstable political situation.
The report noted the government's slim parliamentary majority and its diverse nature as a factor that could hinder policymaking. It also noted that "Israel has only had technical budgets based on an adjusted 1/12th rule since 2019 due to a run of inconclusive elections. There are also expenditure pressures from social inequality and low employment, in particular among ultra-Orthodox and Arab groups."
The report also addressed Israel's current security situation.
"Israel's credit profile has shown resilience to periodic conflicts. Key risks include instability in Syria and relations with Iran, in the context of the latter's nuclear program and apparent Israeli countermeasures. Israel remains concerned by Iran's influence in neighboring Syria and Lebanon, and reportedly continues to intervene in Syria with air strikes to counter the presence and activities of Iran or Iranian proxies. Risk remains of another conflict with Hezbollah, although there has not been a large-scale clash since 2006, and both sides would suffer losses and Lebanon is in the middle of a domestic crisis," the report read.
The report took note of the Abraham Accords, but said that "It remains to be seen whether they lessen the geopolitical risks facing Israel. Economic benefits are likely to be limited given the modest size of their economies compared with existing trade partners."
The report even took note of the internal tensions during the May fighting in Gaza. The report's analysis stated that even though the clashes between Israelis and Palestinians revealed "serious fault lines," these only had a limited adverse effect on the economy.
"THE EXACT methodology used by the ratings agencies is not publicly released. But ratings are based on a mix of public information and private information provided by the debt issuers," according to Eliza Wu, Associate Professor in Finance at the University of Sydney. Wu's explanation appears in "The Conversation," a not-for-profit media outlet written by academics and researchers.
"When it comes to giving the federal government a rating, agencies will use publicly available economic data such as economic growth, income per capita and unemployment and inflation rates. This gives the agency an idea of the current state of the economy, as well as where it might be in the short and long term," Wu explained.
She continued, "Agencies will also look at the federal government’s budget. They will consider the gap between revenues and expenditures, when the government’s debts are due, and the quality of assets that the government could sell off."
Wu added that "the agency will look at the wider economic and political context. This includes the quality of financial regulators and levels of corruption and political stability. It also includes potential internal or external vulnerabilities, such as an economic slowdown in China or the possibility of a trade war. All of these factors have an impact on the ability and willingness to repay debt, even if they are beyond the government’s control."