S&P affirms Israel's A rating

Standard & Poor's affirmed Israel's investment grade A rating on Friday, saying it expects no further fiscal deterioration.

The credit rating agency also said the deterioration had been cyclical in origin and that it expects economic reforms to continue to be implemented.

S&P has a Stable outlook on Israel, which means it does not expect to downgrade Israel's credit rating. The agency also assigned an A rating to the country's newly issued 1.5-billion-euro sovereign bond maturing in 2020.

"We believe that the global recession hurt Israel's export performance in 2009. Nevertheless, Israel runs structural current account surpluses, and the Bank of Israel increased its foreign exchange reserves to more than $60 billion at year-end 2009 from $43 billion a year earlier," S&P wrote in its statement.

S&P said gross external financing needs in 2010 are expected to account for 85% of the Bank of Israel's reserves plus current account receipts, calling it "a significant improvement from the 109% in 2008."

However, the firm also noted that public finances remain a weakness, as the ratio of general government debt to gross domestic product rose to 80% by the end of 2009.

In addition, risks to the credit profile emanate from security issues.

"Any prolonged conflict with Hamas or Hezbollah that involves regional countries, particularly Iran, would have a negative impact on the ratings. The cost of these potential conflicts would, in our opinion, likely strain Israel's public-sector accounts and significantly reduce its fiscal flexibility," the analyst wrote.

Any progress in settling the security issues would prompt S&P to consider raising its ratings on Israel. Conversely, fiscal setbacks or substantial weakening of the security situation would put downward pressure on Israel's credit rating.