International credit rating agency Fitch Ratings has affirmed Israel's ratings. Israel's long-term foreign and local currency Issuer Default Ratings (IDR) remain at 'A' and 'A+', respectively. The outlooks are Stable. The issue ratings on Israel's senior unsecured foreign and local currency bonds have also been affirmed at 'A' and 'A+', respectively. The Country Ceiling has been affirmed at 'AA-' and the Short-term foreign currency IDR at 'F1'.
"Israel's IDRs balance a strong external balance sheet, robust institutional strength, solid macroeconomic performance and substantial financing flexibility with an elevated government debt/GDP ratio and high geopolitical risks," Fitch's announcement says.
Listing the factors behind the reaffirmed rating, Fitch notes that the central government deficit narrowed to 2.8% of GDP in 2014, the lowest since 2008. "A budget for 2015/16 may not be in place until 4Q15, allowing time for the new government, formed in May, to formulate its fiscal plans. In the absence of a budget, a fiscal rule will keep spending unchanged in real terms, allowing a further narrowing of the deficit. Early indications from the new coalition suggest a more expansionary fiscal stance in 2016," Fitch says.
Government debt is high, but on a gradual downward trend at 67.1% of GDP at end-2014, Fitch notes, and says that a further fall is expected during the forecast period, but that debt/GDP will remain above the peer median of 47%.
"The external balance sheet is a strength and Fitch forecasts it will improve. Gas production should ensure sustained current account surpluses, which we forecast to average just over 3% of GDP over 2015-2016."
Fitch observes that Israel has stronger and less volatile growth than its peers despite occasional conflict-related fluctuations. Shekel weakness, expansionary monetary policy, higher investment, a stronger global economy and a rebound from the Gaza conflict are forecast to underpin growth of 3.4% in 2015. Inflation is currently negative, but looks set to return to within the authorities' preferred range of 1%-3% by the end of 2015 due to currency depreciation and a pick-up in economic activity.
As for the new government formed by Benjamin Netanyahu, Fitch says that it appears fairly cohesive in terms of policy, but holds only 61 of the 120 seats in the Knesset.
The factors that could lead to an improvement in Fitch's rating for Israel are sustained progress in reducing the public debt/GDP ratio towards the category peer median; a sustained easing in geopolitical risk; and a continued strengthening of the external balance sheet. Negative rating action could result from a sustained deterioration of the public debt/GDP ratio or a serious worsening of geopolitical risk.
Fitch does not expect a military conflict between Israel and Iran, and assumes the civil war in Syria will continue without seriously destabilising neighbouring states or directly spilling over into Israel. Renewed conflict with Hamas in Gaza is not ruled out, despite a serious degradation of the latter's military capacity. The tolerance of the rating and outlook depends on the economic and fiscal implications of any conflict. Fitch does not assume any breakthrough in the peace process with the Palestinians.
Published by Globes [online], Israel business news - www.globes-online.com - on May 10, 2015
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