Fitch Ratings, the international rating agency, today revised the outlook on Israel's long-term foreign currency rating to Stable from Negative. At the same time the agency affirmed Israel's long-term foreign currency rating at 'A-' ('A minus'), its short-term foreign currency rating at 'F1' and its Long-term local currency rating at 'A'. The outlook on the long-term local currency rating remains negative.
Fitch's analsts wrote: "The foreign currency rating action acknowledges the continued stability and in some cases improvement in Israel's external indicators, an improved macroeconomic policy mix following measures taken in May and contained in the 2004 budget, an improved external environment, and signs of economic recovery. Israel became an overall net external creditor last year and the position has strengthened this year as Israel has moved into current account surplus.
"On the policy front, the new government's May emergency package has stemmed, though not prevented, a severe overshoot in the 2003 state budget deficit which should, however, fall on the basis of the 2004 budget. The government has also embarked on a series of ambitious and long overdue structural reforms. Improvements in these areas are now supporting the trend toward lower interest rates, in sharp contrast to early 2002 when the credibility of fiscal policy was especially weak and undermined monetary policy. Improved external conditions are demonstrated by the strong recovery in foreign direct investment this year.
"The global economic recovery, in conjunction with improved Israeli competitiveness, has revived exports and contributed to a recovery in GDP growth which is expected to gain strength next year, helped also by falling domestic interest rates. The US guarantee program has also played an important part in buttressing international and domestic confidence and demonstrates continuing strong US support for Israel.
"The decision to retain the negative outlook on the local currency rating reflects a further increase in public debt, which Fitch estimates will end the year at around 107% of GDP, and the possibility of further increase in 2004. Fiscal credibility, though improved, is still weak.
"Fitch believes the 2004 budget is based on more credible figures than in recent years, and notes in particular that tax revenues have begun to increase and could exceed the estimates for 2003 that underlie the budget. In some scenarios the debt ratio is close to stabilizing. On the other hand, even if the government achieves its 4% of GDP state deficit target next year, the nominal general government deficit might only stabilise at a still high 6% of GDP and public debt would continue to rise, albeit less rapidly than in 2001-2. Fiscal projections are also hampered by the absence of a detailed reconciliation of the state deficit and the more internationally comparable general government deficit which is the main driver of the public debt figures. More frequent general government data would further improve fiscal transparency.
"Fitch's decision to downgrade the local currency rating a year ago, while affirming the foreign currency rating, was a reflection of the differential pressures on external and public finances, which continue, and the evident ability of external finances to withstand a severe deterioration in public finances. Given the still high proportion of indexed domestic debt and by contrast the unique structure of the external public debt, half of which benefits from a US government guarantee, a situation could arise in which the equalisation of the local and foreign currency ratings was justified. On the other hand, the local currency rating outlook could revert to stable if public debt showed signs of stabilizing and had a credible prospect of falling. This will not be clear until later next year.
"Creditworthiness would benefit from enduring progress in the peace process. However, notwithstanding efforts to revive the 'Roadmap', Fitch merely assumes a continuation of the status quo."
Published by Globes [online] - www.globes.co.il - on December 16, 2003