Credit rating agency Fitch today confirmed Israel's A+ credit rating, with a stable outlook. According to Fitch, Israel's credit rating balances strong external accounts, institutional soundness, and solid macroeconomic performance against a ratio of government debt to GDP that is still higher than in reference countries, and against political and security risks.
The announcement published by Fitch shows that Israel's external accounts remained strong in 2016. Israel has had a current accounts surplus every year since 2003, and the Bank of Israel's foreign currency reserves continued their upward path. Fitch expects Israel's status as a net lender to persist.
Fitch also takes note of the contribution of the natural gas sector to growth in Israel, writing that further development of the gas sector will provide additional support for Israel's external balance. The rating agency believes that starting in 2013, production of gas from the Tamar off-shore gas field has reduced Israel's need to import natural gas. The government approved a revised regulatory framework for the gas industry in July 2016, thereby giving a green light for continued development of the Leviathan gas field, where production is slated to begin in 2020.
Fitch's economists state in the report that Israel's public financing is still a weak point in comparison with A-rated countries. The ratio of government debt to GDP continued to decline in 2016, reaching 62.2%, but this is still higher than the median for the reference countries. The government deficit was relatively small in 2015-2016, because strong private consumption and the housing market contributed to higher-than-projected tax revenues.
The rating agency expects the government deficit to increase in 2017-2018, and predicts that the ratio of government debt to GDP will remain unchanged during those years. The analysts comment that other characteristics of the public debt are quite good. Israel enjoys considerable financial flexibility, such as a deep and liquid domestic market and good access to international capital markets.
The Fitch analysts predict that Israel's credit rating will remain constrained by political and security risks, but the profile of its rating has demonstrated its resilience in the face of periodic conflicts and political shocks for a prolonged period.
Fitch believes that the likelihood of a real peace process remains poor. According to the rating agency, the local political system is likely to be turbulent, with most governments not lasting for their full term. The risk of new elections was highlighted by the tensions in the patchy coalition, but none of the coalition parties has any incentive for bringing about early elections. Fitch writes that Prime Minister Benjamin Netanyahu is subject to growing pressure from a number of police investigations.
Fitch concludes that further significant progress in reducing the ratio of government debt to GDP or a sustained reduction in political and security risks will improve Israel's rating profile. On the other hand, a prolonged deterioration in the ratio of public debt to GDP, a significant worsening in the political and security risk, or a decline in the state of Israel's external accounts is liable to have a negative impact on Israel's credit rating.
Minister of Finance Moshe Kahlon said, "Israel's credit rating is further evidence of the soundness of the Israeli economy and the confidence it is inspiring among the world's leading rating agencies. Confirmation of the rating proves that it is possible to increase public spending for social ministries, ease the tax burden, and boost Israelis' disposable income, while at the same time fostering a stable and prosperous economy."
Ministry of Finance Accountant General Rony Hizkiyahu said, "The report stresses the great importance of responsible debt management, combined with lowering the debt-GDP ratio, for improving the credit rating. The rating company is praising the debt structure and management and the government's financing flexibility, which reflects a deep and liquid domestic market and access to the international capital markets."
Published by Globes [online], Israel Business News - www.globes-online.com - on April 26, 2017
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