Moody's warns on slower growth

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The ratings agency kept Israel's A1 rating and stable outlook but is concerned about economic developments.

Moody's Investors Service has warned today on Israel's slowing growth and higher defense spending. However the rating agency has maintained Israel's A1 sovereign rating and stable Outlook, which it says are underpinned by its resilient growth model and effective governance.

Moody's said, "Key to Israel's economic dynamism is a high-tech export sector that benefits from the country's well-educated, relatively young population, as well as one of the highest levels of per capita investment in research and development. Foreign capital inflows are also substantial, as evidenced by the recent decision of Intel to build its $6 billion new chip plant there.

Moody's added, "Israeli growth started to slow this year even before the latest conflict with Hamas in Gaza, mainly because of the negative impact on exports of a steeply appreciating currency. The Gaza conflict will put a significant dent in third quarter growth, further weighing on the overall forecast for 2014."

Moody's Senior VP Kristin Lindow, "Growth is likely to pick up next year due to the impact of easier monetary policy and the associated weakening of the shekel since late July. Israel will benefit from stronger growth of the US economy, its most important trading partner, and the more modest pickup in European growth."

Moody's continued, "The current account surplus has shrunk during the past two years and will continue to remain narrow due to the rollout of investment programs to expand offshore natural gas development."

"Additional defense spending has derailed plans for bringing the government budget deficit down to 3% in both 2014 and 2015, especially since the Finance Minister has ruled out tax increases. Moody's expects Israel's debt-to-GDP ratio to remain stable at around 67%."

According to Moody's, Israel's extensive geopolitical challenges continue to constrain the ratings. These include territorial disputes with the Palestinians, intense civil strife in Egypt and Syria and the stand-off with Iran over its nuclear program. Intermittent conflicts pose near- to medium-term risks for the public finances and impair Israel's standing in the international community.

Israel's creditworthiness could improve following a substantial further reduction in the government's debt levels would improve Israel's creditworthiness. Conversely, the rating outlook could be lowered to negative if the commitment to fiscal discipline, in particular the consensus around fiscal consolidation, were to wane. The rating also could be downgraded in the event that geopolitical developments appear to pose heightened challenges to Israel's economic stability and result in a significant deterioration of the public finances," Moody's concluded.

Published by Globes [online], Israel business news - www.globes-online.com - on October 1, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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