In its annual credit report on Israel released yesterday, Moody's Investors Service says that its A1 government bond rating and "Stable" outlook are underpinned by Israel's high economic, institutional and government financial strength, but that the rating is constrained by significant social and political challenges, which lead to moderate susceptibility to event risk. The annual report is an update to the markets and does not constitute a rating action.
"Israel's high economic strength was supported by its relatively high GDP per capita ($31,200 in 2011) and its economic resilience, which has been illustrated in recent years during frequent economic and political shocks," Moody's writes. "However, this resilience is being challenged once again by the ongoing eurozone debt crisis and the concurrent slowdown in the global economy. The Israeli economy's pace of recovery following the global recession in 2009 has slowed as the contribution of net exports became a drag on the economy last year for the first time since 2007, a trend continued into the first quarter of this year."
Although Moody's currently assesses Israel's institutional strength as high, based on the government's effectiveness, rule of law and transparency, it cautions that political instability and corruption stand out as important weaknesses relative to its A-rated peers. "Failure to effectively address these issues could eventually jeopardize the country's high institutional strength assessment," it warns.
Moody's warns that the Israeli government's commitment to fiscal discipline is waning as growth has slowed, and that volatile domestic politics and regional political upheavals have delayed fiscal corrections that would have kept the budget deficit on target the last two years. "Additional spending has been allocated to address the acute problems in the housing sector, related primarily to affordability. Other social spending hikes in response to last year's widespread popular demonstrations and secular increases, mainly associated with demographic trends, will require strict prioritization to conform to the fiscal rule that sets a ceiling on the growth of government spending," it says.
Moody's says that the standalone NIS14 billion tax package approved in August included mainly tax-raising measures that will narrow the deficit in 2012 and 2013, but notes that the government has eased its fiscal strategy substantially for the coming years, after having missed its deficit targets in both 2011 and 2012 by widening margins.
"The 2013 budget may be delayed owing to the likelihood of early elections being called before the end of the year. Going forward, the sustainability of the public finances also will depend upon how well the government manages the revenue from natural gas sales, in particular whether it is able to restrict the share of gas revenues used to finance current spending in order to build up a sovereign wealth fund," says Moody's.
As for Israel's natural gas industry, Moody's says, "The negative impact of the cutoff of Egyptian gas supplies on the Israeli balance of payments will be more than offset as Israel's own gas production increases substantially between 2013 and 2016."
Moody's judges Israel's susceptibility to event risk as moderate based on the domestic and external political risks facing the country. "The Arab Spring revolutions have ironically created problems for Israel, for whom the 1979 peace treaty with Egypt has been critical to its security framework. The violent uprising in Syria and concerns about Iran's nuclear program have led the government to maintain a high level of defense spending, representing about 15% of total government expenditure," it says.
Published by Globes [online], Israel business news - www.globes-online.com - on September 4, 2012
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