Standard & Poor's Rating Services has raised its long-term foreign currency sovereign credit rating for Israel to "A" from "A-", the long-term local currency rating to "AA" from "A+", and the short-term local currency rating to "A-1+" from "A-1". S&P reiterated its short-term foreign currency rating at "A-1".
The long-term foreign currency outlook is "positive" and the long-term local currency outlook is stable. S&P also raised its transfer and convertibility assessment for Israel to "AA" from "AA-".
S&P credit analyst Veronique Paillat-Chayrigues says, "The upgrades reflect the improved resilience of Israel's public finances and economy to geopolitical risks after a four-year period of uninterrupted and above-expectation fiscal consolidation, external asset accumulation, and robust economic growth.
S&P added that the rating was supported by Israel's prosperous economy and strong political commitment to long-term fiscal consolidation. However, "above-peer general government debt burden and geopolitical risks are the main constraining factors."
S&P noted that fiscal consolidation intensified during 2007 and that the debt-to-GDP ratio was heading downward to 82%, which was still high and hampered budgetary flexibility that Israel needs to face the costs of unexpected security developments. It adds, however, that Israel has additional borrowing flexibility thanks to the US loan guarantees.
S&P warns that main threat to Israel's risk rating is its security situation, which could worsen if Iran continues to develop a nuclear fuel program and that there is a substantial risk that Israel would be embroiled in any eventual military conflict. Paillat-Chayrigues says, "The impact on the Israeli economy would almost certainly be greater and longer lasting than the war with Hizbullah in mid-2006." She adds, however, that Iran's capacity to cause direct harm to Israel would be severely depleted in any first strike.
The positive outlook incorporates expectations that government debt reduction will remain the key policy priority. Paillat-Chayrigues says, "In this context, it is expected that the 2008 budget will pass the Knesset without any notable loosening."
As for the Annapolis conference, she says that it "is unlikely to lead to major advances on the peace process, but any material progress toward a settlement of the key security issues would impact the ratings favorably through positive repercussions on domestic stability, economic growth, and investor confidence."
Prime Minister Ehud Olmert welcomed S&P's decision to raise Israel's credit rating as a highly significant expression of confidence in the Israeli economy and in the government's economic policy.
National Economic Council Director Prof. Manuel Trajtenberg, who met with S&P's representatives during their recent visit to Israel, said that the decision would greatly contribute to the progress of the Israeli economy and would allow the government to channel greater sections of the state budget towards implementing its priorities. He added that raising Israel's credit rating highlights the importance of the government's maintaining fiscal confidence and underscores the need to set clear guidelines for reducing the public debt.
Published by Globes [online], Israel business news - www.globes-online.com - on November 27, 2007
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