Fitch Ratings today reaffirmed Israel's long-term foreign currency Issuer Default Rating (IDR) at 'A' and local currency IDR at 'A+, both with a "Stable" outlook, citing the country's diverse and advanced economy. It also cited the start of gas flow, and predicted that it will boost Israel's growth rate to 3.7% in 2013.
"Israel has strong and well developed institutions and a diverse and advanced economy. Human development indicators and GDP per capita are significantly higher than peers, and the education system and business environment promotes innovation. The macro-economic policy framework is well developed and has been supportive." It adds that Israel's growth has been more resilient and less volatile than peers. Although the economy weakened over 2012, the start of gas production is expected to lift real GDP growth to 3.7% in 2013 from 3.2% in 2012.
Fitch warns, however, that Israel's political risk is high. "The recently installed coalition brings together parties with diverse objectives and interests and is so far untested. In addition, Israel is in a hostile region. Troubled relations with countries in the region necessitate high defense spending and can cause sporadic disruptions to economic activity. The risk of a military strike against Iran's nuclear program is possible, although not Fitch's base case, and would have uncertain consequences."
Fitch also cautions about Israel's public finances, saying, "Debt is high, albeit stable, and reducing it will be hampered by large fiscal deficits, due to revenue shortfalls and increased spending pressures." It adds, "Revenue weakness pulled the central government deficit to 4.2% of GDP in 2012 from 3.3% of GDP in 2011 and the general government deficit to 5.2%. The new government has a mandate to reduce the deficit, although it faces significant spending pressures that derailed the last government."
It adds, "Debt management capabilities are a strength. Israel has access to a diversified and deep domestic investor base, reducing the need for foreign funding. The country can also tap various sources of external finance and has tried and tested options in the event of disruption to external market access."
As for gas flows, Fitch says, "The start of offshore gas production will support real growth and the external position in 2013 and provide greater predictability of energy supply. The displacement of expensive fuel imports should be sufficient to return the current account to surplus this year and strengthen the net creditor position. Due to the structure of development and production contracts and planned rises in the domestic electricity price, the main economic benefits and the start of significant fiscal revenues, and potentially export revenues, fall beyond the rating horizon."
Fitch says that an improvement in the debt/GDP ratio closer to the official target of 60%, based on a reduced fiscal deficit, and a material reduction in political risk could lead to a rating upgrade. However, a flare-up in external hostilities, such as an Israeli attack on Iran, would prompt a negative rating action, because of the retaliation. "The extent of the action would depend on the economic and physical damage Israel suffered and the situation at the end of hostilities," it says. Other reasons for a downgrade could be serious disruption stemming from events in Syria or sustained deterioration of the debt/GDP ratio.
Published by Globes [online], Israel business news - www.globes-online.com - on April 25, 2013
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