S&P affirms Israel’s AA-rating despite economic hit

"Israel is in a good position compared to other countries who are struggling [financially] with the coronavirus crisis."

The S&P Global logo is displayed on its offices in the financial district in New York City (photo credit: BRENDAN MCDERMID/REUTERS)
The S&P Global logo is displayed on its offices in the financial district in New York City
Global ratings agency S&P has kept Israel’s credit rating at AA-, labeling it as stable, despite the economic hit the country has taken from the pandemic.
The AA- status was originally given in February 2019. The two main limitations of the rating remain the relatively high debt burden and the geopolitical risks.
“S&P has rated Israel’s credit rating status at a high level, and with no change even during the global coronavirus crisis, and while it has downgraded the credit rating of other developed countries,” said Prime Minister Benjamin Netanyahu.“We will continue to lead the Israeli economy responsibly and assist businesses, the self-employed, salaried employees and anyone affected by the coronavirus crisis.”
S&P said it was due to proactive government efforts that Israel’s rating remained the way it did.
The rating is “a great expression of confidence in the Israeli economy,” said Finance Minister Israel Katz.
S&P predict that Israel’s economy will shrink due to financial effects of the pandemic by an average of 5% in 2020 for the first time in two decades, but will recover by more than 4.5% in 2021.
Following the pandemic crisis, S&P analysts predict that the government deficit will increase to over 12% of the GDP and the net government debt ratio will stand at 73% of the GDP by 2020.
Company representatives noted that despite the fiscal challenges created by the pandemic, and the fact that Israel has gone through three elections with ambiguous results over the past 18 months, they anticipate that the government will begin efforts to reduce the budget deficit starting in the second half of 2021.
Under this scenario, government deficits will drop to 4% in 2022-2023, and public debt will stabilize at around 77% of the GDP.
“Israel is in a good position compared to other countries who are struggling [financially] with the coronavirus crisis, due to the policy carried out in providing extensive assistance to all the various sectors in addition to maintaining budget frameworks and creating future growth engines,” Katz said.
According to Katz, the Finance Ministry intends to promote a series of laws and reforms that will benefit the economy and its citizens, while continuing to formulate a budget for 2021.
S&P representatives emphasized the core strengths of Israel’s credit rating, such as the rich and robust economy, strong external accounts, and benefits that develop the country from flexible monetary policy and a relatively deep pool of local savings.
Unlike other countries in the region, Israel enjoys a very flexible monetary policy, which allows the Bank of Israel to support government financing needs while keeping recruitment costs under control.
The Bank of Israel’s government bond purchase program, which was presented in October, could support Israel’s additional fundraising needs without significant inflation risks and exchange rates. S&P expects the government to take austerity measures in the second half of 2021.
Moreover, S&P expects that the normalization agreements signed between Israel, the United Arab Emirates and Bahrain to contribute to economic, commercial and security cooperation between the three countries.
S&P notes that in the event that fiscal conduct is stronger than their current forecasts or there is a significant improvement in the security environment in the Middle East, a positive rating action is possible.
Alternatively, a negative rating may occur if the economic slowdown is deeper and longer, leading to a more significant deterioration than expected in fiscal status. Negative pressure on the rating may also be created if Israel, beyond the immediate effects associated with the pandemic, lacks a medium-term fiscal stabilization plan and net government debt continues to exceed company expectations.
“The credit rating, at its highest level at the height of a global crisis and a continuous period of uncertainty, shows the strength of Israel’s economy on the eve of the crisis, the long-term fiscal commitment and the variety of channels that exist for the country to fund its activity,” said Gil Cohen, the Finance Ministry’s senior deputy accountant-general.