The Standard & Poor’s credit rating agency believes that the significant cut of some NIS 14 billion ($3.5 billion) in Israel’s State Budget will be implemented regardless of upcoming elections.
The agency’s economists, who visited Israel in the summer and met with the finance minister and Bank of Israel governor, affirmed the country’s A+ rating on Friday, noting that “the stable outlook reflects our view that there is sufficient political will to prevent a sizable increase in the government’s debt burden, and that major security risks will be contained.”
In September 2011, S&P raised Israel’s foreign currency sovereign credit ratings to A+ and its local currency ratings to AA-. Then, as now, the main factors for the decision are the governmental policy over the State Budget and public debt and natural gas discoveries in the Mediterranean Sea.
“We forecast that by the middle of the decade, domestic natural gas production should contribute to improved external and fiscal balances,” the agency’s economists noted in their report.
They also believe that despite a weak global economic environment and a temporary slowdown in 2012 and 2013, Israel’s gross government debt burden should modestly decline over the forecast horizon – to 71% of GDP by 2015 (compared to 76% today).
“We note that there has been fiscal slippage on account of lower government revenues,” the report says, “although recent austerity measures and current growth levels should ensure that debt ratios modestly improve in the medium term. ”
It should be mentioned that during their recent visit to Israel, the agency’s economists threatened to consider downgrading the country’s credit rating should the government avoid raising taxes.
According to the current review, despite the difficulties facing the Israeli economy today as a result of the global financial crisis, which negatively affect the demand for Israeli products worldwide, the State’s economic horizon in the medium term is positive.
S&P believes that the Israel will attain average real per capita GDP growth of 1.8% through 2015 (7% overall) and an average deficit of 2.8% of GDP during 2013-2015.
The economists noted, however, that there are several downside risks to these forecasts stemming from spillover effects from some highly leveraged holding companies of Israeli conglomerates, whose dividend income from operating companies has markedly fallen this year.
“Risks could also come from a rapid appreciation in housing prices, which could spill over to broader price increases. That said, we believe that the Israeli banking sector is adequately regulated and capitalized by international standards.”
Peace would raise credit ratings?
The positive report was met with satisfaction by Treasury officials. Finance Minister Yuval Steinitz noted after reading the report that “the company’s announcement reaffirms the fact that Israel is the only Western country whose credit rating has been raised since the start of the global crisis, and reiterates the need for maintaining a budgetary discipline and responsible economic policy.”
It should be noted, however, that despite the positive forecasts, the agency chose not to upgrade Israel’s credit rating, which remains relatively low compared to North America and European countries.
“We could consider raising our ratings on Israel if it makes material progress in defusing external security risks,” the report says, noting that the geopolitical situation continues to pose serious constraints on Israel’s credit rating.
“In this regard, Israel’s traditionally tense relations with Palestinians in the West Bank and Gaza are further complicated by the stand-off with Iran, lawlessness on Israel’s shared border with Egypt, a civil war in Syria, and radicalized domestic groups eager to provoke confrontation.
“Any significant armed conflict with Israel could have a negative impact on the ratings, if it deters investment, weakens the economy’s growth potential, or strains fiscal flexibility.”
