Fitch affirms Israel’s credit rating but cautious on judicial reforms

REUTERS/Ilan Rosenberg

Fitch Ratings on Wednesday affirmed Israel’s ‘A+’ sovereign credit rating with a “stable” outlook, citing strong government finances, but it said that a planned judicial overhaul plan could weaken the country’s credit profile.

In maintaining Israel’s rating, Fitch said it “balances a diversified, resilient and high value-added economy and strong external finances against a high government debt/GDP ratio, elevated security risks and a record of unstable governments that has hindered policymaking.”

But it questioned proposals that would give the government greater sway on selecting judges and limit the power of the supreme court to strike down legislation.

“The reform could have a negative impact on Israel’s credit profile by weakening governance indicator or if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment,” Fitch said.

It said some countries that have passed major institutional reforms reducing institutional checks and balances have seen a significant weakening of World Bank governance indicators, but added that it is unclear at this stage whether the proposed reforms in Israel would have a similarly large-scale impact.

Critics of the planned law changes say Prime Minister Benjamin Netanyahu – on trial on graft charges that he denies – is pursuing steps that will hurt Israel’s democratic checks and balances, enable corruption and bring diplomatic isolation.

Proponents say the changes are needed to curb what they deem an activist judiciary that interferes in politics.

The plan has led to weekly mass protests across Israel and warnings from leaders in the private sector, while also helping to weaken the shekel by some 8 percent against the dollar the past month.

On fiscal policy, Fitch projects a budget deficit of 1.2 percent of gross domestic product this year, after a 0.6 percent surplus in 2022, with further deterioration in 2024 to a 2.5 percent of GDP deficit. It also foresees Israel’s debt/GDP to drop to 57.9 percent by 2024 from 61.6 percent in 2022.

It also estimates economic growth of 2.9 percent this year, less than half of 2022’s growth but enough to resist a downturn.

Fitch said Israel’s ratings are constrained by geopolitical risks, yet saw a serious escalation over Iran’s nuclear programme with significant rating implications as only a tail risk.