International rating agency Fitch reaffirmed Israel’s A+ rating and stable outlook. However, Fitch mentioned the judicial reform planned by the government and said it could weaken Israel’s credit profile and also warned that weakening the independence of the central bank would reduce the credibility of the elaboration. Israeli policies.
Regarding Israel’s economy itself, Fitch said: “Israel’s ‘A+’ rating weighs a diversified, resilient, high value-added economy and strong external finances against a high public debt-to-GDP ratio. , high security risks and a record of unstable governments that have hampered policy-making.”
On the planned judicial reform, Fitch wrote: “The government has made it a priority to pass judicial reform that would reduce the powers of the Supreme Court and give more power to the ruling majority in the Knesset over legislation. and the appointment of judges. The reform came up against strong opposition from civil society and politicians.
“While the exact content of the reform is still under negotiation in parliament, Fitch believes that the reform could have a negative impact on Israel’s credit profile by weakening the governance indicator or if the weakening of institutional controls leads to poorer policy outcomes or lasting negative investor sentiment.
“Some countries that have adopted major institutional reforms that reduce institutional checks and balances have experienced a significant weakening of the World Bank Governance Indicators (WBGI), the most influential indicators in our Sovereign Rating Model (SRM), and which , in some cases, reduced the model score by about 1 notch, with the impact accumulating over several years.It is unclear at this stage whether the proposed reforms in Israel would have a similar impact on a large scale.
Fitch also notes with concern: “Some members of the Knesset and government have proposed restricting central bank independence and limiting the pass-through of interest rates on mortgages. So far, these efforts have been resisted by the Prime Minister and Although not our base case, a weakening of central bank independence would reduce the credibility of Israel’s policymaking, currently a ratings force.
Fitch also sees budget deficits returning after the adoption of the state budget for 2023 and 2024. “Israel will operate on a technical budget with capped monthly spending until the coalition government made up of Likud and mainly parties pass budget, likely in 2Q23 We expect the central government fiscal balance to deteriorate from around 1.8% of GDP in 2023, to -1.2% (Government draft budget target : 1% of GDP), with a further deterioration to -2.5% in 2024. income growth due to the disappearance of exceptional support factors in 2022 (capital income, taxes on real estate transactions) and increasing pressure spending on coalition commitments and infrastructure needs. Public sector wages are also expected to push up spending, with wage negotiations currently underway after several years of stabi wage rate.
“We see risks to this forecast as the budget will pass through the Knesset, additional promises have been made to appease key constituencies and there are risks on the revenue side. Beyond the current draft budget, the authorities are likely to pursue a policy of increasing subsidies that favor low-employment demographic groups at the expense of balanced budgets given the right-wing aversion to tax hikes.
In response to Fitch’s memo, Finance Minister Bezalel Smotrich said, “Israel’s economy is strong and, God willing, will remain so. we have succeeded in making the State of Israel an island of stability, economic growth and an excellent place for investment.
“The credit rating proves that we are taking all the right steps to move the State of Israel forward.”
Published by Globes, Israel business news – en.globes.co.il – March 1, 2023.
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