(Communicated by the
Ministry of Finance)
On September 27, 2013, The S&P Credit Rating Agency reaffirmed the credit rating of the State of Israel at a level of A + with a stable outlook. The credit announcement was published following the annual visit to of the S&P analysts in Israel in August, during which they met with the Minister of Finance as well as the senior management at the Ministry of Finance, The Deputy Governor of the bank of Israel and other officials from both the public and business sector.
Key rating considerations:
The fiscal discipline expressed by the approval of the 2013-2014 budget, which the rating agency expects to result in a slight decrease in the public debt; In light of this, the company reaffirmed the foreign and local currency rating at A +.
The rating’s stable outlook reflects the opinions of the analysts that the Israeli government will continue its policy of fiscal discipline and that the influence of security risks on the Israeli economy will remain low and under control.
In its announcement, the company noted that the rating reflects the fact that the Israeli economy is diverse and prosperous, the positive medium-term impact of the production of natural gas on the current account and monetary flexibility. Geopolitical risks and government accounts, which are improving, constitute the main restrictions on the current rating.
The rating agency estimated that the real GDP growth per capita in 2013 will be 1.2%. This percentage is similar to that recorded in 2012; however, S&P noted that considering the positive contribution of the natural gas on growth in 2013 (about 0.7%), this indicates a weakening in economic activity. The company predicts a gradual return to an actual average GDP growth per capita of 1.7% during the years 2014-2016, which is consistent with the expected recovery in Israel’s major export markets.
The rating company also refers to the new GDP data published by the Central Bureau of Statistics on September 8, 2013, following the changes in methodology which caused an increase of 6.9% to the GDP measured in 2012. According to the company, approximately half of this increase is due to the inclusion of investments in intangible assets and product brokerage revenues. The company noted that it is waiting to receive additional data prior to integrating the new numbers in its analysis. However, the new data will apparently not have any impact on Israel’s rating. Nevertheless, the rating company concludes that this is a positive development in the Israeli economy.
Regarding the burden of government debt, the rating agency estimates that the public debt will grow to 4.4% of the GDP in 2013 and the average increase in debt for the years 2013-2016 will amount to 3.3% of GDP. However, the net debt-to-GDP ratio, which currently stands at 68%, is expected to drop to less than 65% in 2016 since the GDP is expected to grow slightly more than the increase in debt during this period.
The rating agency considers Israel’s external accounts to be one of the economy's strengths, commends the fact that Israel is a net lender to the world and expects the net negative debt to reach 30% of the GDP (70% compared to current account receipts). In addition, the company expects the country's external debt to drop below the reserves of the Bank of Israel and the external assets of the financial sector to be approximately 42% of current account receipts in 2016. The company bases these forecasts on the fact that the current account returned to a surplus of approximately 1% of the GDP in 2013, and it is expected to continue and grow. The company also expects that the external financing needs of the Israeli economy will continue to decline to below 80% of the current account receipts in 2013.
In addition, the company indicates that it considers the flexibility of the monetary policy to be a sign of strength, and reiterated that the Bank of Israel had announced it would relieve the pressures for revaluating the shekel by purchasing foreign currency in accordance with an evaluation of the impact of gas exports on the current account. The company added that the surplus in the current account and direct investments in the economy, which were in excess of 3% of the GDP in recent years, led to pressure for revaluation making it difficult for the Bank of Israel to control inflation and moderate the supply of credit to the housing market. In addition, the rating agency estimates that there is a certain risk in the uncertainty that exists in the Bank of Israel management and in the fact that half of the Monetary Committee, including the acting Governor, are due to end their terms and their replacements have not yet been appointed. Notwithstanding, the company concludes that the Bank of Israel has sufficient strength and institutional power to properly manage the situation and expects the appointments to be completed in the near future.
The rating agency defines Israel’s institutions as being efficient and having a sufficient degree of transparency and credibility. However, the company noted that the political system tends to be unstable and policy predictability is limited. In addition, the threats to Israel’s security escalate political uncertainty by creating an additional point of dispute between the various parties.
The rating agency noted that geopolitical risks restrict the rating, and used the example of the recent tension in the Golan Heights, or the action in Gaza by the Israeli government in November 2012, to illustrate the speed with which Israel could enter a military conflict. The company indicates Israel's relations with the Palestinians, the war in Syria and the instability in Sinai as factors that could lead to a possible deterioration in the medium term. The rating agency repeated that any military conflict can negatively affect the rating, since such a conflict could affect investment in the economy, potential growth or external, monetary and fiscal flexibility.
The stable outlook reflects the rating agency's opinion that the government will continue its policy of fiscal discipline and the reducing of the government debt. The company also believes that the security risks on the Israeli economy will continue to be low and in control.
Finally, S&P concluded that they would be able to consider raising the rating if the security situation improves, and if the improvement positively influences internal stability, economic growth and investor confidence. On the other hand, a weakening of the downward trend in debt-to-GDP, a decline in growth, or deterioration in the security situation will create negative pressure on Israel’s rating.
The following are the current ratings of Israel by the international rating agencies:
- S&P: A+ stable
- Fitch: A stable
- Moody’s: A1 stable