Fitch affirms Israel's rating

The outlook for the 'A' long-term foreign currency rating is positive.

Fitch Ratings has affirmed Israel's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A' and 'A+', respectively. The Outlook on the Long-term foreign-currency IDR is Positive and the Outlook on the Long-term local currency IDR is Stable. The issue ratings on Israel's senior unsecured foreign and local currency bonds have also been affirmed at 'A' and 'A+', respectively. The Country Ceiling has been affirmed at 'AA-' and the Short-term foreign currency IDR at 'F1'.

"The decision is a further expression of confidence in the Israeli economy and in the economic policy led by the Ministry of Finance," said Minister of Finance Yair Lapid.

In March, S&P confirmed its rating for Israel at A+ with a positive outlook.

Among key drivers behind the Fitch rating, analyst Paul Gamble cites the fact that fiscal consolidation remains on track. The central government deficit narrowed to 3.2% of GDP in 2013 compared with a budgeted 4.3% of GDP and a 2012 deficit of 3.9% of GDP, due to tightening measures and various one-off factors. Revenue strength resulted in a small surplus in the first quarter of 2014, compared with a deficit of 0.5% of GDP in the first quarter of 2013. Political commitment to consolidation appears strong and a fiscal rule has been tightened, Fitch says. It forecasts a further narrowing of the central government deficit to 2.5% of GDP in 2015.

"Debt is relatively high, at 67.4% of GDP at end-2013 compared with the 'A' median of 52.3% of GDP, but it is forecast to stay on a downward trend… The external balance sheet is stronger than peers. The start of gas production has caused a structural improvement in the balance of payments that will support continued current account surpluses, which are forecast to average 2.6% of GDP over 2014 and 2015. Large inflows of foreign direct investment (FDI) and intervention in the foreign exchange market have also lifted reserves, pushing the net creditor position to a new high at the end of 2013. Growth is faster than peers and is picking up after likely bottoming in 3Q13. Real GDP growth was 3.3% in 2013, but at around 2.6% excluding gas, was the lowest since 2009. Growth is forecast to average 3.5% of GDP in 2014 and 2015," Fitch states.

Fitch notes steps that have been taken to overcome structural weaknesses in the Israeli economy, including the law to reduce concentration of ownership in the private sector, and says that increasing labour force participation from ultra-orthodox men and Arab women, partly in response to government initiatives, is holding down wage inflation, but adds that in both areas there is significant scope for further progress.

"The current Outlook is Positive," Fitch states, "Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a downgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include: - A sustained deterioration of the debt/GDP ratio. - A serious worsening of geopolitical risk… Current regional conflicts are assumed to continue, but their impact on Israel not to worsen materially. Fitch does not expect a military conflict between Israel and Iran. Fitch assumes civil war in Syria will continue without seriously destabilising neighbouring states or directly spilling over into Israel. Fitch does not assume any breakthrough in the peace process with the Palestinians or exclude the possibility of renewed conflict with Hamas in Gaza.

"Fitch assumes that the ruling coalition will hold together and remain committed to lowering the deficit over the forecast period. Gas supply and associated revenue streams are assumed to flow in line with the authorities' assumptions. Production at Tamar is expected to continue uninterrupted. Fiscal and export revenues from gas will be low during the forecast period. Fitch assumes that house price inflation will ease and that house price movements will not destabilise the financial sector."

Published by Globes [online], Israel business news - - on May 25, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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