Israel's Fourth Election Doesn't Shake Its Credit Rating, for Now

S&P's forecast remains cheery and they expected the economy to recover due to its successful COVID vaccine drive, but analysts raise concerns that persistent divisions could leave an impact on key macroeconomic indicators

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Consumers line up to enter a clothing store at a shopping center in the city of Beersheba, southern Israel, Sunday, Feb. 21, 2021
Consumers line up to enter a clothing store at a shopping center in the city of Be'ersheba, southern Israel, following the end of coronavirus restrictions last monthCredit: Tsafrir Abayov,AP

A week after Israel held its fourth general election in two years with dim prospects for forming a stable government, Standard & Poor’s said on Tuesday it didn’t expect to see any immediate change in the country’s “macroeconomic settings” but warned that continued fragmented politics could change that.

“Although the situation does not pose an immediate risk, if it persists, finding consensus on specific medium-term fiscal consolidation priorities could prove difficult,” analysts Maxim Rybnikov and Karen Vartapetov said in a note.

The credit-ratings firm, which rates Israel an AA-minus /stable, said it expected the Israeli government to run a budget deficit of 7.1% of gross domestic product this year, a large figure but down from nearly the 12% it amassed in 2020 when spending to counter the coronavirus pandemic caused spending to balloon. S&P said Israeli public debt would stabilize at 80% of GDP at the end of 2021 after rising sharply in 2020.

The analysts said they expected the Israeli economy to recover this year as the vaccination drive enables businesses to reopen. That, in turn, should help the government collect more taxes and improve its fiscal position.

S&P said political uncertainty and volatility will remain “elevated” in the coming months and expressed skepticism about the ability of Israel’s parties to build a stable coalition. Nevertheless, the analysts said that after 2021, the government should be able to focus more on fiscal matters.

S&P also noted that it was taking into consideration factors beyond Israel’s fiscal position.

“A sovereign’s willingness and ability to service debt on time and in full also depends on factors such as monetary flexibility, balance-of-payments position, and economic resilience. Israel scores favorably on all of these, supporting its existing sovereign ratings,” the note said.

Israel is scheduled for its next rating review May 14, S&P said.

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