Credit rating agency Fitch today reaffirmed Israel's A+ long-term debt rating with a stable outlook. Fitch said that its rating reflects a balance between strong external accounts, solid macroeconomic performance, and institutional soundness on the one hand, and a still high rate of government debt to GDP, compared with reference countries, and political and security risks on the other.
In response to the retention of Fitch's rating, Minister of Finance Moshe Kahlon said that the rating was "further evidence that in its 70th year, Israel's economy is stronger than ever, and has won great confidence from the world's leading rating agencies. Confirmation of the rating proves that public spending for social ministries can be increased, the tax burden can be reduced, people's disposable income can be bolstered, and a stable and prosperous economy can be developed at the same time."
Ministry of Finance Accountant General Rony Hizkiyahu said, "Reaffirmation of the rate reflects positive fiscal performance, and once again demonstrates the importance of continue a policy that encourages growth, while preserving fiscal frameworks and lowering the burden of debt."
Fitch writes that the government deficit is projected to rise to 2.8% of GDP in 2018 and 3% in 2019. The deficit target for these two years is 2.9%, so the agency's announcement can be interpreted as a warning against deviating from the deficit target for 2019. As for cutting taxes, the rating agency notes that Kahlon spoke in recent weeks about his wish to cut taxes, and comments that there is potential for a tax revenue surplus, as happened in 2015-2017, given the economic momentum, the tight labor market, and unanticipated events. Fitch says that another tax cut incurs a risk if revenue continues to provide surprises at a time when the political parties are preparing for the next elections scheduled in November 2019.
Despite Fitch's compliments about the Ministry of Finance's debt management in recent years, the rating agency states that despite the improvement that has occurred, the volume of public debt in Israel still constitutes a weak point in comparison with other countries with an A rating. Fitch explains that public debt in Israel is still high, although the budget deficit has been less than planned in each one of the past five years, and even though the rate of debt to GDP fell from 95% in 2003 to 60.9% in 2017.
As a comparison, Fitch states that the rate of debt to median GDP in the group of countries rated A by the agency in 2017 was 47%, and the corresponding figure for countries with an AA rating was 42%. Fitch emphasizes that Israel was poorer in both the government budget deficit and the volume of its interest payments than the median for the comparison countries. The agency also pointed out that the strong point of Israel's debt was the 8.4% ratio of external debt to GDP in 2017, compared with 20% in 2006.
Concerning the Israeli economy, Fitch says that growth would remain steady in 2018-2019, although the rate would fall to 3%. Developments listed by Fitch likely to bring about an upside include expansion of Intel's plant and the development of the Leviathan natural gas reservoir. The agency's list of risks includes the possibility of a global trade war, housing market problems, and increased security risks.
Commenting on the situation in Syria, Fitch cited the recent attacks by the Israeli air force and the growing risk of a military conflict with Hezbollah. The agency said that the conflict in Syria continues to be an unsolvable geopolitical complication that was generating a growing risk for Israel, but added that the Israeli economy had demonstrated in the past impressive resilience in the face of military conflicts with various groups in the region.
Published by Globes [online], Israel business news - www.globes-online.com - on April 18, 2018
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