In a report on the Israeli economy released yesterday, international rating agency Moody's says that "Israel's resilient growth model, effective governance and steadily improving debt metrics underpin its A1 government bond rating and stable outlook."
Kristin Lindow, a Moody's Senior Vice President and co-author of the report, said, ""Israel's economic growth has outpaced that of most advanced industrial economies over the past decade, supported by a competitive high-tech export sector, substantial spending on research and development and a well-educated labor force."
Moody's does however note that the export of natural gas from the discoveries off Israel's coast is being delayed by regulatory and political considerations. It estimates that any boost to the economy will come in 2018 at the earliest, and that Israel is liable to lose the main upside from its gas discoveries, particularly from the Leviathan field, if the delays continue.
On Israel's economic growth prospects in general, Moody's says, "After a relatively robust rebound from the global financial crisis, weaker demand from its trading partners and a strong shekel have weighed on Israel's export sector since 2011 and have moderated the country's growth. Moody's expects these factors will continue to constrain growth though 2016. While Israel is one of the few advanced countries that has a lower debt-to-GDP ratio now than before global financial crisis, slower growth and higher fiscal deficits have caused Israel's debt burden to improve at a slower pace in the last three years."
Moody's also says that Israel's volatile and divisive political system is contributing to slower fiscal consolidation. "The last government dissolved in December 2014 after a short 20-month tenure and without finalizing a 2015 budget. The new government took six weeks to form after the March election, ultimately culminating in a coalition holding a very narrow one-vote majority. Partly as a consequence, the budget negotiation process was even more lengthy, leaving the government without a budget for much of 2015. The agreement finally reached at the end of August is a biennial budget encompassing both 2015 and 2016, targeting 2.9% of GDP deficits for each year, which Moody's expects to be approved before the December 1st deadline," the report states.
Moody's forecasts that Israel's 2015 budget deficit will come in at a below-target 2.5% of GDP, due to spending restrictions related to the late approval of the budget and the strong revenue results in the first eight months of the year. However, higher spending set for 2016 -- such as civil servants' salary increases -- are likely to result in the deficit widening to 2.9% of GDP. In the context of the rating agency's forecasts for nominal GDP growth, these deficits would be sufficiently low for the debt-to-GDP ratio to continue to decline.
"A substantial further reduction in the government's debt levels and a decline in regional geopolitical tensions would put upward pressure on Israel's government bond rating. Conversely, the government's rating could face downward pressure if such tensions heightened, threatening Israel's economic stability, or if the government's commitment to fiscal discipline was to falter," the Moody's report says.
Published by Globes [online], Israel business news - www.globes-online.com - on October 8, 2015
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