S&P: Israeli economy expected to 'absorb' coronavirus shock

While the economy is expected to contract by 5.5% this year, entering recession for the first time in two decades, it is projected to recover by more than 6% in 2021.

By EYTAN HALON
A bank employee counts Israeli Shekel notes for the camera at a bank branch in Tel Aviv (photo credit: REUTERS)
A bank employee counts Israeli Shekel notes for the camera at a bank branch in Tel Aviv
(photo credit: REUTERS)
Israel's economy should be able to "absorb the shock" of the coronavirus pandemic due to its strong macroeconomic fundamentals and high monetary flexibility, S&P Global Ratings researchers forecast as they affirmed Israel's AA- sovereign credit rating.
While the economy is expected to contract by 5.5% this year, entering recession for the first time in two decades, it is projected that it will recover by more than 6% in 2021, supported by the global economic rebound and aided by the success of its large hi-tech sector.
"The stable outlook on Israel balances downside risks from the COVID-19 pandemic against Israel's resilient economy and its strong external position," said researchers, citing the country's quick policy response to containing the pandemic despite "protracted political turbulence."
Fiscal measures to contain the impact of the outbreak and the economic downturn are expected to widen the government deficit to 10.3% of GDP in 2020, compared to the already high deficit average of 3.8% in 2018-2019.
Despite that, S&P researchers affirmed that there are "reasons not to be overly concerned about fiscal stability," including highly flexible monetary policy settings; excellent access to domestic and international capital markets; a broad political consensus on containing public debt; and ample space to alter taxation rates and improve compliance.
Should the sovereign credit agency's baseline scenario materialize, the incoming government will start consolidating fiscal accounts in 2021, leading to a decline in government deficits to 5% in 2021 and under 3% in 2022-2023.
Going forward, researchers said, recovering global demand for Israeli services and the development of offshore natural gas fields – offering significant export potential – should enable Israel's current account surplus to return to pre-pandemic levels of approximately 3% of GDP.
Outgoing Finance Minister Moshe Kahlon welcomed S&P's decision to affirm Israel's credit rating.
"Prior to the outbreak of the coronavirus crisis, the Israeli economy soared and reached its best status in its history," Kahlon said. "I am pleased to see that credit rating companies, despite the global coronavirus crisis, continue to believe in the Israeli economy and its capability to return to financial strength."
In late April, Fitch Ratings affirmed Israel's A+ credit rating, forecasting that GDP would contract by 5.6% in 2020 and rebound by 5% in 2021. Moody's also affirmed its A1 rating for Israel but reduced its outlook from positive to stable, citing the recent deterioration in the budget deficit and Israel's weakening fiscal policy effectiveness, driven in part by a "more polarized political environment."