On Friday, rating agency Fitch announced confirmation of Israel's sovereign rating at 'A', with an upgrade of the outlook from 'Stable' to 'Positive'. Ministry of Finance officials told "Globes" that they expected the upgrade. They said that Fitch had last upgraded Israel's rating in February 2008, and that since then changes had taken place in Israel's economy enabling the agency to upgrade its outlook.
"They were here on a visit, and they saw that we were headed for a fiscal deficit below the target, that the debt to GDP ratio was on a downward trend, and that the fiscal position was better than it had been in 2008. A further contributory factor was the gas discoveries, where changes have also been seen since the last rating change," a Finance Ministry source said.
Does that mean that we can expect an upgrade to 'A+'?
"Yes. It means that there is a reasonable chance that within a year or two Fitch will come into line with Moody's and S&P and upgrade its rating. Fitch is a more conservative rating agency, but the improvement in the fiscal position is what ultimately made them upgrade their outlook."
If that happens, can we expect interest rates to fall and takes to be cut?
"Theoretically, yes. Of course that has to be hedged by saying that a thousand and one things could have an effect."
Fitch said in its announcement, "Fitch Ratings has affirmed Israel's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A' and 'A+' respectively. The issue ratings on Israel's senior unsecured foreign and local currency bonds have also been affirmed at 'A' and 'A+' respectively. The Outlook on the Long-term foreign currency IDR has been revised to Positive from Stable. The Outlook on the Long-term local currency IDR is Stable. The Country Ceiling has been affirmed at 'AA-' and the Short-term foreign currency IDR at 'F1'.
"The revision of the Outlook on Israel's Long-term foreign currency IDR reflects the following key rating drivers and their relative weights:
- The fiscal deficit is forecast to come in well below target this year. Based on data for the first 10 months Fitch predicts that the central government deficit will be 3.4% of GDP in 2013 versus a target of 4.3% of GDP and a 2012 outturn of 3.9% of GDP. Performance has been driven by a combination of consolidation measures, under-execution of budgeted spending and one-off factors.
- The new government has turned around the fiscal position and is committed to a credible medium-term programme for further deficit reduction. Tax hikes and spending cuts are planned for 2014 and a proposal to tighten the ceiling on real expenditure growth (one of two fiscal rules) is being examined. The modest reprofiling of the consolidation programme in late November does not alter Fitch's view on the official commitment to reduce the deficit.
- Public debt sustainability has improved. Improved fiscal performance combined with an upward revision to nominal GDP has lowered the debt/GDP ratio. Fitch expects the GDP ratio to fall to 65.4% of GDP in 2015, closer to the authorities' long-term target of 60% of GDP.
- Gas production has begun smoothly, new discoveries have been made and an export policy (although not the modality of exports) has been agreed. Gas output has allowed a reduction in energy imports, which has contributed to a fall in the trade deficit of 0.8% of GDP over the first 10 months of 2013 and is likely to boost GDP by a similar amount over the year. A greater certainty and stability of energy supply will bolster the manufacturing sector. Fiscal revenues from gas are currently low.
Israel's 'A' IDR also reflects the following key rating drivers: Near-term risks of a military conflict with Iran have eased following the P5+1 deal. Israel will be vigilant in ensuring Iran sticks to its commitments in the deal and any transgression could provoke a military response. There has been minimal direct spill-over from the conflict in Syria, although the course of the conflict and the impact on other neighbouring states remains uncertain. There has been little progress on peace talks with the Palestinians since they restarted earlier this year. Progress has been made in tackling structural weaknesses. In particular, a reduction in allowances should encourage greater participation in the labour force. Measures to reduce concentration in the private sector are under way. The authorities have taken advantage of favourable market conditions to lengthen the average maturity of debt and tap the international market. Debt management and high domestic and external financing flexibility are a rating strength. Israel's strong and well-developed institutions and education system have led to a diverse and advanced economy. Human development indicators and GDP per capita are high and the business environment promotes innovation, reflected in several major FDI transactions in the hi-tech sector this year. Political risk is a constraint on Israel's ratings.
The Positive Outlook reflects the following risk factors that may, individually or collectively, result in an upgrade:
- A sustainable narrowing of the fiscal deficit consistent with fiscal rules, especially the deficit ceiling.
- Continued progress in reducing the debt/GDP ratio towards the category peer median level.
- A sustained easing in geopolitical risk.
Published by Globes [online], Israel business news - www.globes-online.com - on December 1, 2013
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