S&P today reiterated its A+ long-term foreign currency sovereign credit rating with a "Stable" outlook for Israel. It also reiterated its A-1 short-term foreign currency sovereign credit rating and 'AA-/A-1 local currency rating.
S&P said, "We note fiscal slippage in Israel because of lower government revenues, although in our view recent austerity measures and current growth levels should ensure that debt ratios modestly improve in the medium term. While the upcoming elections temporarily raise uncertainty over fiscal planning, we believe any incoming government will continue to pursue prudent macroeconomic and fiscal policies."
S&P added, "The stable outlook reflects our view that there is sufficient political will to prevent a sizable increase in the government’s debt burden, and that major security risks will be contained."
S&P noted that the announcement of early elections, because of the failure to agree on a budget, came after the most contentious austerity measures had already been agreed. These are expected to raise government revenues by more than 1% of GDP (namely, a 1% increase in VAT effective September 1, and an income tax increase from January 1, 2013). "Strong polling numbers, the government’s focus on foreign policy issues and the preference for outlining specific expenditure cuts after an election apparently motivated the government to return to the ballot box," it says.
"While this may seem reminiscent of the frequent turnover of past Israeli governments, the current government has been the longest serving for more than 20 years. At the same time, the elections do raise uncertainties: the internal distribution of power within the coalition could shift, or introduce a new party to the government. We recognize the risk that, because socioeconomic issues are more prevalent than usual in these elections, this could bind coalition members to campaign promises that complicate future fiscal policy.
"Nevertheless, our base-case scenario remains that the next Israeli government will continue to view containing public debt as a cornerstone of policymaking. In the short term, the failure to pass a 2013 budget means that the 2012 budget applies at least until April, in effect imposing more-severe spending limits than under the proposed 2013 budget. After an estimated deficit of 4% of GDP in 2012, we believe this would help reduce the deficit to 3.3% in 2013.
"In the medium term, we believe moderate economic growth will limit debt reduction. We forecast gross general government debt to decline only modestly to 70.6% of GDP in 2015, from 74.7% in 2012. Thereafter, large-scale production of natural gas could accelerate the pace of debt consolidation, both through direct income receipts for the government as well as through indirectly raising trend growth rates."
S&P concluded, "We could consider raising our ratings on Israel if the government makes material progress in defusing external security risks, as this would have positive repercussions on domestic stability, economic growth, and investor confidence. Conversely, we believe that any significant setback with regard to reducing the government’s high net debt burden, a decline in growth prospects, a structural reversal in external performance, or a substantial deterioration of the security situation in Israel could put downward pressure on the rating."
Published by Globes [online], Israel business news - www.globes-online.com - on October 17, 2012
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