Fitch announced today that it has affirmed Israel's 'A' rating and raised the country's outlook to 'positive'. It also affirmed Israel's long-term foreign and local currency ratings at 'A' and 'A+' respectively. The agency also raised the outlook on the foreign currency debt from 'stable' to 'positive', while the outlook on the local currency debt remained 'stable'.
The agency cited the following reasons for revising the outlook from stable to positive:
The fiscal deficit is forecast to come in well below target this year. Based on data for the first 10 months of 2013, Fitch predicts that the deficit will be 3.4% of GDP in 2013 as opposed to a target of 4.3% of GDP and a 2012 deficit of 3.9%. The positive results are driven by a combination of a tightening of fiscal measures, under-execution of budgeted spending and the gaining of 'one-off' revenues.
The new government has completely turned around the fiscal position and is committed to a further medium-term deficit reduction. Tax hikes and spending cuts are planned for 2014 and a proposal to tighten the ceiling on real expenditure growth (entire expenditure) is being examined. The modest change recently made in direct taxes (cancellation of the tax hike in January 2014) does not alter Fitch's view on the government's commitment to reduce the deficit.
The agency notes favorably the decrease in the debt/GDP ratio, attributable to a combination of positive fiscal performance and a higher GDP due to a change in the measurement method. The agency foresees a debt/GDP ratio of 65.4% in 2015, closer to the medium-term target of 60%.
The gas production started smoothly, new discoveries have been made and agreements on exports have been reached. Gas output has allowed a reduction in energy imports, contributing to a fall in the trade deficit of 0.8% of GDP over the first ten months of 2013, and is likely to boost GDP by a similar amount over the year. Greater certainty and stability of energy supply will bolster the manufacturing sector. Fiscal revenues from gas are currently very low.
Near-term risks of a military conflict with Iran have eased following the deal that was reached. Israel will be vigilant in ensuring that Iran sticks to the deal reached with it, and any transgression could provoke a military response.
The effects of the internal conflict in Syria on Israel are minimal, although the course of the conflict and its impact on neighboring states remains uncertain. There has been little progress in peace talks with the Palestinians since they restarted earlier this year.
Progress has been made in tackling structural problems in the Israeli economy. Fitch notes, in particular, the reductions in allowances that should encourage greater participation in the workforce. Additional measures are being planned to reduce concentration in the private sector.
The government has taken advantage of favorable market conditions to lengthen the average maturity of debt and raise funding in the international markets. Debt management and high domestic and external financing flexibility are a rating strength.
In addition, Israel's strong and well-developed government institutions and education system have led to a diverse and advanced economy. The human capital indicators and the GDP per capita are high, and the business environment promotes innovation, reflected in several major acquisitions in the high-tech sector made by foreign investors this year.
Geopolitical risks are 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 compliance with the deficit target, continued progress in reducing the debt/GDP ratio towards the median level of the peer group, and a sustained easing in geopolitical risk.
The present rating outlook is positive, consequently Fitch does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a downgrade. However, a revision of the rating outlook to stable could result from future developments, such as: a sustained deterioration in the debt/GDP ratio, serious encroachment of the Syrian conflict or a renewed intensification of hostilities with Iran.
Key assumptions by Fitch include the following:
The high level of geopolitical risk is factored into Israel's credit rating. Current conflicts in the Middle East are expected to continue, but their impact on Israel will not worsen materially. Fitch does not foresee a military conflict between Israel and Iran, and it assumes that the civil war in Syria will continue without destabilizing neighboring states or directly spilling over into Israel.
The agency does not foresee any breakthrough in the peace process with the Palestinians, and it does not exclude the possibility of renewed conflict with Hamas in Gaza.
Fitch assumes that the present ruling coalition will hold together and remain committed to lowering the deficit over the forecast period.
Gas supply and associated revenue streams are assumed to be in line with government forecasts. Production at Tamar is expected to continue uninterrupted. Fiscal revenues from gas will be low and there will be no exports during the forecast period.
Fitch assumes that the financial sector will remain stable in the face of rising house prices. It also foresees a gradual improvement in the global economy over the forecast period.
The Minister of Finance, Mr. Yair Lapid, said: "We will continue implementing a responsible and balanced policy that puts the working middle class at the center and generates economic growth."
The following is Israel's present rating by the international rating agencies:
S&P: A+ Stable
Fitch: A Positive
Moody's: A1 Stable