Israel’s Credit Rating Stays Up, With Warning for Downgrade Should Judicial Overhaul Continue
Despite an A+ rating from Fitch Ratings, Israel may risk harming its economy as divisive reforms continue to push ahead
Fitch Ratings reported on Monday that it would retain Israel’s A+ credit rating but continued to warn of fallout if the government advances with its planned overhaul of the judiciary.
The credit rating, given by several rating firms throughout the year, is an assessment of a government’s credibility regarding its financial obligations and debt. Despite undergoing a period of domestic unrest, Israel is still considered to be financially stable in that regard.
While it is good that the credit rating remained stable and positive, there are warnings in the report about the future that must not be ignored
“On that level, there is no doubt that Israel’s position has not worsened,” Dan Catarivas, president of the Israeli Federation of Bi-national Chambers of Commerce, told The Media Line. “Israel has high reserves and the ratio between debt and GDP [gross domestic product] has not changed; these are the main things credit rating firms look at.”
“The report needs to be read soberly,” he continued. “While it is good that the credit rating remained stable and positive, there are warnings in the report about the future that must not be ignored.”
For Israeli Prime Minister Benjamin Netanyahu, the credit report provided more ammunition against growing opposition in the country.
“This confirms what I have been saying for a long time: We have a strong economy,” Netanyahu said, just minutes after the Fitch announcement. “Whoever invests in Israel profits. Whoever pulls out of Israel loses. People understand this.”
The Tel Aviv Stock Exchange responded with green screens in light of the positive report card.
Netanyahu and Finance Minister Bezalel Smotrich both used the Fitch report in order to fend off increasing criticism of the government.
“When you look at the real data, you get a picture that is the opposite of what the news channels are trying to create night after night,” Smotrich said in a video released on his social media accounts. “In face of the false panic campaigns, there is excellent data and we will do everything to keep it that way.”
Smotrich has repeatedly accused the Israeli media of misrepresenting the facts and creating a grim picture of the economy, which he insists is robust.
Since the beginning of the year, Israel has been in an unprecedented political crisis, creating fears that its economy will also suffer from the ripple effects. Israelis are increasingly divided on government policies with massive anti-government demonstrations rocking the country.
The Netanyahu coalition vowed a series of widespread reforms in the justice system, which their opponents say will weaken Israeli democracy. Last month, the first law pertaining to the overhaul was legislated after weeks of failed negotiations with the opposition. Netanyahu promised he would seek a broad consensus on the rest of the reform, but in a series of interviews, it was unclear whether he would follow up on that.
Supporters of the overhaul, which in its original form included a significant curtailing of the courts, say the judiciary has accumulated too much power in recent decades and has become increasingly involved in political decisions despite it not being an elected body.
In an interview with Bloomberg last week, Netanyahu indicated that he would shelve most of the components of the plan, but not before moving ahead with the most significant and contentious component—changing the makeup of the judge selection committee. This step will likely be initiated when the Parliament resumes its session after the summer break and is expected to provide further fuel for the protest movement that has emerged in recent months.
While positive, the credit report does not come without warning.
“Fitch believes the changes may have a negative impact on Israel’s credit metrics if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment or weakens governance indicators,” read the statement from the rating firm. The report projects a slowdown in the economy but does not attribute it directly to the judicial reform. It is important to note that the Israeli government, like other governments and financial entities, pays for companies such as Fitch to rate its credit.
“It is hard to measure how much of the report is driven by an interest of Fitch to maintain the Israeli government as a client,” Dr. Alex Coman, a senior financial analyst who teaches at the Academic College of Tel Aviv-Yaffo, told The Media Line. “I will be very surprised if the next credit rating Israel receives will remain the same.”
Israel’s economy is undergoing a major period of uncertainty. Coupled with external circumstances of a global slowdown and rampant inflation, the internal turmoil has not contributed to its ability to bounce back.
“The report does not ignore the situation and the continuance of the period of uncertainty—how will this affect investments, the high-tech sector, and other parameters that measure the stability of the economy,” Catarivas said. “If the uncertainty continues, Israel’s credit rating could be downgraded.”
Data published by the Finance Ministry shows a gradual decrease in the country’s income from tax revenue since the beginning of the year. A report by Start-Up Nation Central (SNC), a nonprofit organization that monitors Israel’s high-tech ecosystem, shows more than half of the startup companies in the country have begun moving their funds outside of Israel and intend to extract workers from the country as well. While a reduction in foreign investment in the tech sector can also be attributed to the global economic climate, the Israeli sector has added vulnerability due to the internal instability.
Israel’s tech sector has become the engine of its economy in recent years, representing over 15% of its GDP. While in the US, venture capital investments have begun to recover, Israel is lagging. Should this continue, the country’s income from taxes is expected to decline, further increasing the budget deficit. This will in turn almost dictate a downgrade in the credit rating.
“The current report is very short-sighted,” Coman said. “We are seeing a significant decrease in taxes from high-tech, real estate, and natural gas—three major sectors that Israel expected to profit from.”
The current report is very short-sighted. We are seeing a significant decrease in taxes from high-tech, real estate, and natural gas—three major sectors that Israel expected to profit from.
On the other hand, government expenditure is increasing. If the two trends persist, this does not bode well for the economy.
The report continued to downplay the undercurrents of the judicial reform and the subsequent protest movement.
“Fitch considers the current measures … unlikely to trigger a material exodus of talent and capital in the high-tech sector,” read the report. However, there is extensive talk of brain drain and relocation. While this is so far mostly talk, it cannot be ignored. According to the SNC report, over 30% of companies are planning to offer relocation packages to their employees.
Fitch’s rating was published less than a month before another credit rating agency, Moody’s Investors Service, warned about “negative consequences” and “significant risk” to the Israeli economy due to the judicial reforms.
The opposition in Israel has vowed to continue demonstrating against the judicial overhaul. With a solid majority in Knesset, Netanyahu can continue moving forward without seeking a broader agreement. However, in light of the warning signs being raised regarding the economy, he might put a hold on his plans.
“Being on standby is a problematic position to be in for the economy,” Catarivas summarized.
