Israel's Ministry of Finance sees the downgrade of Fitch Ratings' of its outlook for Israel's rating as predictable, and as objectively reflecting the state of the Israeli economy. Fitch has downgraded the outlook for Israel's sovereign long-term foreign currency issuer default rating from Positive to Stable. The outlook on the Long-term local currency IDR is Stable. The long-term foreign and local currency IDRs have been affirmed at 'A' and 'A+' respectively. The issue ratings on Israel's senior unsecured foreign and local currency bonds are also affirmed at 'A' and 'A+' respectively. The Country Ceiling is affirmed at 'AA-' and the Short-term foreign currency IDR at 'F1'.
Fitch rates Israel's foreign currency debt one grade below the ratings of Moody's and Standard & Poor's. A year ago, Fitch changed its outlook for its Israel rating from Stable to Positive. This meant that it was considering coming into line with the other international agencies, and therefore had to monitor developments in Israel's economy closely. The current decision means that Fitch has changed its mind about a possible upgrade for Israel, but does not indicate an imminent downgrade.
The Ministry of Finance recognizes that it was unrealistic to expect an upgrade for Israel at present given the current political instability and the budget proposal for 2015 that raises the fiscal deficit target and halts the process of reducing Israel's debt to GDP ratio.
In its announcement of the change, Fitch said the change in outlook was because of the expected wider fiscal deficit in 2014 and 2105 as a result of Operation Protective Edge in Gaza in the summer. "Fiscal consolidation has been set back by military operations against Hamas in Gaza in the third quarter," Fitch's announcement says, and continues "Fitch forecasts a central government deficit of 3.3% of GDP this year, compared with a budgeted target of 2.8% of GDP. Additional military spending is contributing to a widening of the budgeted deficit to 3.4% of GDP in 2015. This will also mean the fiscal expenditure rule is likely to be breached. A tighter budget is planned for 2016, which in Fitch's opinion will be tough without new revenue-raising measures.
"Government debt is fairly high, at a Fitch-forecast 67.4% of GDP at end-2014. Progress in lowering debt toward the peer median of 48.9% has been disrupted by the Gaza conflict. Financing flexibility is high, with deep and liquid local markets, access to international capital markets, an active diaspora bond programme, and US government guarantees in the event of market disruption. The structure of debt is favourable."
As factors that could lead to an improvement in Israel's rating mentions sustained progress in reducing the public debt/GDP ratio towards the category peer median level and a sustained easing in geopolitical risk. Conversely, a worsening in these factors could lead to a downgrade.
Opposition politicians have been quick to use Fitch's move to attack the government, and particularly Prime Minister Benjamin Netanyahu and Minister of Finance Yair Lapid. . Leader of the opposition, Labor Party chairman Isaac Herzog said, "The world understands what Israel's people experience every day that the economy under Netanyahu and Lapid's leadership is stuck. The fairy tales told by the prime minister and minister of finance about a growing economy are a bluff that has been exposed to all. The budget that the two have presented will lead to further deterioration and will hit the pockets of every citizen."
Meretz leader Zehava Galon said, "The rating outlook downgrade is a result of failed economic policy that is all media spin. Just last week, when Lapid came to the Knesset to present the budget, he dismissed questions from members of Knesset about the negative growth in the last quarter and said, 'the fact is that that the rating agencies are not concerned.'"
Labor MK Erel Margalit said that the downgrade was a slap in the face for Netanyahu, who had lost control of the Israeli economy and left it in the hands of an economic tyro.
Published by Globes [online], Israel business news - www.globes-online.com - on November 22, 2014
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