International credit rating agency Fitch Ratings on Friday affirmed Israel's Long-Term Foreign-Currency Issuer Default Rating as "A+" with a stable outlook.
Fitch's report said the agency expects the global repercussions of the COVID-19 to cause Israel's gross domestic product to shrink by 5.6% in Israel in 2020, with a lingering impact through early 2021.
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Assuming a progressive normalization of the health crisis in Israel and globally, the agency projects a 5% growth in GDP in 2021, and around 3% in annual growth in 2022.
Unemployment, which spiked from 4% in pre-corona days to a staggering 26% over lockdown measures that crippled the private sector, is expected to remain close to 10% at the end of 2020, the agency says.
Israel's Accountant General Rony Hizkiyahu welcomed the report, saying that "the affirmation of the 'A+' rating at a time of an unprecedented global crisis indicates the agency's confidence in the Israeli economy and underscores the need to maintain fiscal discipline even as we deal with the consequences of the coronavirus pandemic in Israel."
Fitch says that it expects the Israeli government's fiscal deficit to surge to over 10% of GDP in 2020, and that the government debt/GDP ratio will to rise to around 77% in 2020 from 60% in 2019, well above the forecast median of around 56% for 'A' category sovereigns.
"Israel still operates without a formal budget due to the lack of a coalition government and is constrained by a spending limit of 1/12th of the 2019 budget each month.
"However, despite the lack of a formal government, the Knesset voted a budget extension of NIS 50 billion [$40 million] in order to fund specific lockdown-related measures announced by the caretaker government and an additional NIS 40 billion [$11 million] increase to the budget deficit compared with the 1/12th rule. We expect the deficit to remain large in 2021 at over 4.5% of GDP due to partial revenue recovery," Fitch's report said.
"While Israel has a strong track record of debt reduction, fiscal discipline has loosened in recent years, casting doubt on the authorities' ability and willingness to adequately address the rising trend in government indebtedness once the health crisis subsides," the agency cautioned.
"Other features of public debt are largely favorable," the agency noted. "The share of external debt is low, at 8% of GDP in 2019. Israel benefits from high financing flexibility, having deep and liquid local markets supported by the central bank's NIS 50 billion (3.8% of GDP) bond-buying program, strong access to international capital markets, an active Diaspora bond program, and US government guarantees in the event of market disruption," Fitch concluded.
