International ratings agency Moody's Investors Service has come into line with its peers, Standard & Poor's and Fitch, by upgrading its ratings for Israel. The government foreign and local currency bond ratings have been upgraded to A1 from A2, and the foreign currency ceiling for bank deposits has been upgraded to A1 from A2 as well. All other sovereign ratings have been affirmed, including the Aa1 country ceiling for long-term foreign currency debt.
In its announcement, Moody's said it had upgraded Israel's key ratings to reflect the country's proven resiliency in the face of repeated economic and political shocks, its firmly established fiscal discipline and its ongoing financial and political support from the United States and the Jewish Diaspora.
"Fiscal reforms are paying off in terms of increased economic vibrancy, diversification and competitiveness, and to the benefit of strengthening tax revenues, in spite of tax cuts," said Moody's Analyst Joan Feldbaum-Vidra. "These factors have led Israel to post consistent current account surpluses, helping to insulate the economy in the current adverse global conditions."
She said that while Israel, which has a globalized and very open economy, is not immune to the current developments. The economy will likely suffer a relatively modest slowdown in growth this year but should still outperform its 1.6% of GDP fiscal deficit target.
"Israel has repeatedly exhibited a very strong willingness and ability to pay its debts," said Feldbaum-Vidra, who is Moody's lead sovereign analyst for Israel. "Fiscal discipline has been maintained in spite of the many security-related demands on public finances, evidence of its commitment to reducing its large government debt."
The analyst commented that Israel's hefty government debt load continues to be an important credit challenge. She said that substantial further reduction in government debt would be a key driver for any future upgrades, as would national security considerations.
Moody's said the difficult security environment continues to constrain Israel's credit ratings. "Undoubtedly, policymakers would focus more keenly on economic and financial issues if national security was less of a concern," said Feldbaum-Vidra. "In particular, investment would be closer to potential without these risks."
She said Israel's competitive edge in high-tech products, relatively wealthy average living standards, deep capital market, and advanced institutional capacity mean that it has graduated from classification as an emerging market economy.
"This is critical to our analysis of Israel, since advanced economies can handle heftier debt loads without significantly increasing default risk," said the analyst. "However, the precarious security environment and high defense needs make less public funds available for necessary upgrades of physical and human capital, which would otherwise firmly situate Israel among the ranks of the advanced industrialized economies."
In response to the upgrade, Israel's Minister of Finance Ronnie Bar-On said, "Precisely at a time of international crisis and instability, Israel's economy receives recognition for its strength and stability. We are charged with the task of continuing to conduct Israel's economic policy responsibly while continuing to maintain a consistent fiscal policy."
Published by Globes [online], Israel business news - www.globes.co.il - on April 17, 2008
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