S&P lifts Israel's credit rating - Haaretz

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Thu., November 29, 2007 Kislev 19, 5768

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S&P lifts Israel's credit rating

By Moti Bassok, Tal Levy and Ido Solomon

Tags: Standard & Poor

The international credit rating agency Standard & Poor's yesterday upgraded Israel's credit rating and gave the economy a positive outlook. This officially means the agency is likely to upgrade Israel's credit rating again, albeit not in the coming months. Moody's and Fitch are also expected to upgrade Israel's ratings.

Finance Minister Roni Bar-On called the upgrade a "certificate of honor" for the economy and the government's economic policy.

In their ratings, the agencies are estimating the probability that a given country will default on its debt. The upgrade means S&P feels the potential for default is less likely now. The practical significance is that Israel can borrow more cheaply. The upgrade reflects faith in Israel's economy and economic prognosis, which indicates that lending to Israel is less risky. Hence, lenders will lower the interest rates they demand, compared with the rates they would demand from a less stable country.

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S&P lifted Israel's long-term foreign currency sovereign credit rating from A-minus to A and noted the positive outlook. It also raised the local long-term local currency credit rating to AA-minus, from A+, with a stable outlook. Israel's short-term local currency rating was upgraded to A-1+ from A-1. S&P did not change Israel's short-term foreign currency rating from A-1,.

S&P explains that four years of uninterrupted and above-expectation fiscal consolidation, external asset accumulation, and robust economic growth have made Israel's public finances and economy more resilient to geopolitical risks. Also, Israel's economic prosperity has been supported by a strong commitment at the political echelon to maintain long-term fiscal discipline.

As always, the fly in the ointment is the security situation, and the risk of Iran's nuclear program, S&P qualifies, not to mention a more harmful war than the one against Hezbollah last year. There is also the onerous national debt, which, although shrinking thanks to treasury policy, remains high.

S&P foresees that Israel's economy will grow 5.4 percent this year, that exports will remain strong and that private year-over-year consumption will have increased. It notes Israel's rapid recovery from the economic effects of the Second Lebanon War last summer, saying that it demonstrates Israel's ability to overcome significant external shocks.

Also, Israel has large, liquid foreign currency reserves supported by its current account surplus, which is running at 3.6 percent of GDP.

S&P does foresee a global economic slowdown in 2008, which could depress Israel's economic growth to 3.5-4 percent, still a respectable pace.

Thanks to rigid fiscal discipline in 2007, Jerusalem has kept its deficit at 0.6 percent of GDP, well below its target for the year: 2.9 percent of GDP. One corollary has been that the national debt has shrunk to 82 percent of GDP, compared with 102 percent in 2003. That heavy debt theoretically constricts Israel's flexibility when coping with emergencies, says S&P, but it is freer to raise money abroad (compared with peer countries) because of American loan guarantees. But S&P adds that the positive outlook is predicated on the assumption that Jerusalem remains committed to reducing the national debt further.

S&P doesn't see the Annapolis summit advancing peace much, though if it does, that would positively impact Israel's credit rating.

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