S&P Maintains Israel's Credit Rating, Despite Doubled Deficit

All along Standard & Poor’s had suspected Israel's deficit estimates were wonky, so it had assumed a deficit of 4% anyway.

Standard & Poor's won't be downgrading Israel's sovereign credit rating even though the government deficit ran roughly double the initial estimate. The credit rating agency had assumed the government's estimates were off all along, it seems.

In October Standard & Poor's projected that the Israeli economy would finish 2012 with a deficit of about 4% of the gross domestic product, says Elliot Hentov, the S&P analyst in charge of the firm's Israel desk.

Israel's Operation Pillar of Defense in the Gaza Strip added between 0.2% and 0.25% to the deficit, S&P says. As such, it wasn't surprised by the Finance Ministry's announcement this week that the deficit had reached 4.2% of GDP.

S&P estimated that the Israeli economy would grow by 2.7% of GDP in 2012 and therefore the present estimate for the year, 3.3%, was a pleasant surprise.

The agency forecast expects the Israeli economy to grow by 3.1% in 2013 (not including any potential economic growth from future production of natural gas) – a somewhat higher estimate than those of the Treasury (2.5%) and the Bank of Israel (2.8%, both excluding roughly 1% more growth due to natural gas production, which should start this year).

Last year S&P upgraded Israel’s credit rating – the only one of the international rating agencies that did so.

For credit raters, the debt-GDP ratio is the the most important issue in Israel.

Unlike other developed economies, Israel has managed to lower that ratio in recent years.

According to S&P, Israel completed 2012 with a debt-GDP ratio of 74.7% and will finish 2013 with a slightly lower ratio, 74.1%. In the coming years the ratio will remain stable or decline mildly, in contrast to the drop in recent years, says the agency. It is not expected to rise – which is what matters, according to S&P analysts.

The ratio could decline gradually during the next three years by 1% annually, to 71% of the GDP in 2015, said Hentov. Any government formed after the coming election will ensure that Israel’s debt-GDP ratio won't increase, according to S&P.

As usual it warned that what could hurt Israel’s credit rating is a downturn in its geopolitical situation, though at the moment the firm is not expecting a change of that sort.

Reuters