The international credit-rating agency, Standard & Poor's, announced on Friday that it had decided to leave Israel's sovereign debt rating in place at A + with a stable outlook for the future.
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The decision followed an annual visit to Israel by representatives of S&P several months ago, during the course of which the delegation met with Finance Minister Yuval Steinitz, Bank of Israel Governor Stanley Fischer and other officials from the public and business sector. "The confirmation of Israel's debt rating, with a stable outlook, is testimony to Israel's economic stability in the face of the global economic crisis," Finance Minister Steinitz said in response to the credit agency's decision. "The agency's announcement reaffirms the fact that Israel is the only Western country that has managed to have its credit rating raised since the outbreak of the global crisis, thus once again underscoring the need to maintain budgetary discipline and a responsible economic policy going forward," Steinitz added.
In its statement explaining why Israel's situation justified confirmation of the country's credit rating with a stable outlook for the future, Standard & Poor's said: "The affirmation reflects our view of Israel's economic policy flexibility as a result of consistent growth and careful macroeconomic management. Despite a weak global economic environment and a temporary slowdown in 2012 and 2013, Israel's gross government debt burden should modestly decline over the forecast horizon - to 71 percent of GDP by 2015."
The agency also noted: "The production of natural gas by the middle of this decade is likely to strengthen the country's net external asset position. These favorable dynamics, combined with Israel's prosperous economy and strong institutions, support the ratings. Significant geopolitical risks, however, are a rating constraint."
In September of last year, when S&P raised Israel's credit rating to A +, it said it would have considered raising it even higher if it were not for Israel's security situation. In its latest statement, the firm noted: "The geopolitical situation continues to pose serious constraints on Israel's credit rating, in our view."
"In this regard," last week's statement said, "Israel's traditionally tense relations with Palestinians in the West Bank and Gaza are further complicated by the stand-off with Iran, lawlessness on Israel's shared border with Egypt, a civil war in Syria, and radicalized domestic groups eager to provoke confrontation. Any significant armed conflict with Israel could have a negative impact on the ratings, if it deters investment, weakens the economy's growth potential, or strains fiscal flexibility."
Michal Abadi-Boiangiu, the accountant general at the Finance Ministry, called her ministry's policy of "responsible and professional debt management" and the reduction in recent years in Israel's debt to gross domestic product ratio essential to maintaining Israel's credit rating. For its part, S&P acknowledged that the government had been forced to revise its original budget deficit targets due to revenue shortfalls, but added: "We believe the political consensus for containing public debt remains intact. We have seen this in recently passed austerity measures - a mix of tax increases and spending cuts - to limit the 2012 fiscal deficit to 4.0 percent of GDP. We believe this target will be met. We forecast an average deficit of 2.8 percent of GDP during 2013-2015."
The agency also noted some of the potential risks on the horizon: "Our forecasts for the fiscal deficit and modestly declining debt burden partly rest on our projection that Israel will attain average real per capita GDP growth of 1.8 percent through 2015 (7.0 percent overall ). However, we recognize downside risks to these forecasts stemming from spillover effects from some highly leveraged holding companies of Israeli conglomerates, whose dividend income from operating companies has markedly fallen this year. Risks could also come from a rapid appreciation in housing prices, which could spill over to broader price increases. That said, we believe that the Israeli banking sector is adequately regulated and capitalized by international standards."