Credit rating agency Standard & Poor's yesterday raised its outlook on Israel's debt from negative to stable. The Finance Ministry has been hoping for such an announcement from the three major ratings agencies for several weeks.
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In view of the change, S&P raised Israel long-term foreign currency debt rating to A minus and short term to A-1. The agency raised the shekel's ratings to A+ and A-1.
The S&P decision is very significant for the Israeli business sector, as well as for the state, making it easier to raise financing abroad and lowering its cost.
S&P wrote in a statement released yesterday that the decision was based on positive economic indicators as well as the government's fiscal discipline. "The revision of the outlook reflects the narrowing of the budget deficit in 2004, prospects for medium-term fiscal consolidation underpinned by the U.S. loan guarantee program, renewed economic growth, and a significant improvement in the balance-of-payments," said Standard & Poor credit analyst David Cooling. "At the same time, geopolitical risks have also stabilized, following a reduction in the level of violence, and the prospect of a new Palestinian leadership to reinvigorate the stalled peace process."
S&P said fiscal outcomes were modestly better than those budgeted in 2004. Expenditure restraint and a stronger-than-anticipated recovery in economic growth enabled the government to meet its deficit target of 4 percent of gross domestic product, according to the ratings agency. At the same time, the agency forecasts the general government debt-to-GDP ratio will stabilize at 108 percent of GDP.
Few material changes in economic policy are expected, despite the addition of the Labor party to the governing coalition, London-based Cooling wrote. "Economic policy is underpinned by conditionality in the recently revised U.S. loan guarantee program, which runs until 2008. The program sets out a clear path of fiscal consolidation and structural reforms."
Growth prospects have improved, the analyst said, with the composition of growth more evenly balanced between exports and domestic demand. In 2005, real economic growth is expected to remain at close to 4 percent, reflecting strengthening external demand and a sharp recovery in private consumption and investment.
According to S&P, Israel's GDP is forecast to expand by an average of slightly under four percent annually for the next five years.
"External vulnerability has declined significantly, and the current account is forecast to remain almost balanced for the foreseeable future, reflecting the recovery in global technology markets, which are a key export sector for Israel," Cooling said.
Finance Minister Benjamin Netanyahu said yesterday in a cabinet meeting that S&P had made it clear beyond any doubt that budgetary restraint and structural reform are the basis for improving the economy.
Newly-minted Housing and Construction Minister Isaac Herzog said at the meeting that recent reports from the Adva Institute think tank indicate an unhealthy erosion of the middle class
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