The approval of Israel’s first state budget in three years is getting positive feedback from global credit rating agencies.
Fitch Ratings said on Thursday that the budget “reduces political uncertainty and potential risks to the public finances, affirming the government’s capacity to advance legislation... in line with our expectations when we affirmed the sovereign rating at ‘A+’ with a Stable Outlook in July 2021.”
Israel also has a Stable AA- rating from S&P Global Ratings, and a Stable A1 rating from Moody’s.
Fitch said Israel’s financial position benefited this year from its strong economic rebound, the gradual removal of pandemic restrictions, and particularly strong fiscal revenues from the hi-tech sector.
Fitch noted that the new budget sets a deficit target of 6.8% of GDP in 2021 and 3.9% in 2022, down from a peak of 11.4% in 2020 due to the pandemic. This represents a slightly faster pace of fiscal consolidation than its July assumptions for deficits of 7.3% and 5.2% of GDP, respectively.
“The government views the budget targets as consistent with its commitment for public debt to peak around 74% of GDP and then decline towards 60% over the medium term,” Fitch said. “In July we said that a persistent rise in government debt/GDP, reflecting for example the absence of sufficient consolidation measures or weaker-than-expected economic growth, could be a driver for negative action on the sovereign rating. In our latest forecasts, we projected that the debt/GDP ratio would not exceed 74% in 2021, and would remain broadly stable in 2022 and 2023.”
Fitch noted that the Economic Arrangements Law that accompanied the budget included numerous structural reforms, including raising the pension age for women, easing trade and import barriers, advancing deregulation, and passing measures to facilitate the economy’s transition to using renewable energy sources.
“The boost to potential growth from these measures is hard to estimate ex ante,” Fitch said. “Israel had five-year average GDP growth of 3.7% before the pandemic, roughly in line with the 4% median for ‘A’ rated sovereigns.”
Fitch’s announcement “indicates the importance of the convergence of the fiscal framework in the coming years, and notes in a positive light the rapid recovery of the Israeli economy from the corona crisis,” Finance Ministry accountant-general Yahli Rotenberg said in a statement.