Standard & Poor's has upgraded Israel's long-term foreign-currency sovereign rating from A to A+ with a "Stable" outlook, four steps below AAA. S&P also reaffirmed Israel's local currency rating at AA-.
S&P said, "The rating action reflects our view of Israel's improved economic policy flexibility as a result of strong growth and careful macroeconomic management… Israel is on a credible path toward continued government debt burden reduction and stronger external indicators."
S&P pointed to Israel's responsible fiscal policy, which supports reducing the debt-to-GDP ratio and that expected tax revenues from the natural gas discoveries will support these trends in the future.
S&P believes that Israel's social protest will not affect the continued reduction of the public debt or the keeping of fiscal discipline. "Nevertheless, in our assessment, there will only be limited changes to the current biannual 2011-2012 budget, with the deficit reaching 3% (of GDP) in 2011 and declining marginally toward 2%," S&P said.
"This is higher than the targets set by the government, and a reflection of our view that regulatory reforms and expenditure reprioritization alone will not satisfy public demands. Yet, given Israel's high growth rates and continued consensus about the need to contain public debt, such a trajectory would nevertheless foresee further debt reduction."
S&P added, "While we estimate a mild slowdown from 2% per capita growth in 2011 to 0.7% in 2012, we believe that Israel will recover to 2-2.5% trend per capita growth in subsequent years," said S&P. "This is a high growth rate for an economy with a GDP per capita above $32,000 and reflects rising investment and improving competitiveness."
S&P warned that ratings were constrained by significant geopolitical risks and a sizeable public sector debt burden. It said that the ratings could be raised further if Israel "makes material progress in defusing external security risks." On the other hand, downward pressure on the rating could arise from "any significant setback with regard to fiscal consolidation, a reversal in external performance, or a substantial deterioration of the security situation in Israel."
"I welcome the government and Ministry of Finance's intention to continue to maintain a responsible fiscal policy and keeping the budget framework, especially in view of the complex global economic reality that will likely affect the Israeli economy. I believe that the Israeli economy will continue to justify the confidence shown by this high rating. We at the Bank of Israel intend to continue to contribute to economic growth and stability by means of a responsible monetary policy that aims at maintaining price stability, contributes to growth and jobs, and helps preserve the stability of the financial system," said Governor of the Bank of Israel Prof. Stanley Fischer in response to the upgrade.
Prime Minister Benjamin Netanyahu said, "The government manages its economic policy in a responsible and serious manner. The government must be responsible and continue its policies that ensure economic growth."
Minister of Finance Yuval Steinitz added, "This is an impressive certification for the Israeli economy, and its successful handling of the global economic crisis of the past three years in the Western world. This achievement stands out against the backdrop of the debts crises and mass unemployment, which have affected the credit ratings of many countries in the world.
"The fact that the rating agency cited the natural gas discoveries as one of the strong points of the Israeli economy demonstrates the importance of formulating an economic model that will ensure substantial government revenues from the development of the natural gas reserves by the Sheshinksi committee. Nonetheless, Israel must not rest on its laurels. The renewed global economic crisis requires us to be extra careful, and preserve the budget framework and the policy principles that S&P emphasized in its statement."
Published by Globes [online], Israel business news - www.globes-online.com - on September 9, 2011
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