On the Heels of S&P / Fitch Upgrades Israel's Credit Rating to Historic 'Stable A'

International rating agency Fitch yesterday upgraded Israel's foreign currency credit rating from A- to a stable A, and local currency credit rating from A to a stable A+.

International rating agency Fitch yesterday upgraded Israel's foreign currency credit rating from A- to a stable A, and local currency credit rating from A to a stable A+. Stable A is the highest rating that Israel has received from the agency since Fitch began rating it in 1995.

Preempting Fitch, international rating company Standard & Poor's raised its sovereign credit rating on Israel to A from A- last November, citing healthy public finances and robust economic growth.

Knowledgeable local sources say that the third-largest rating firm in the world, Moody's, which has recently sent a delegation to Israel, is also set to raise its rating shortly. Sovereign credit ratings are graded between AAA for countries with very strong economies, to CCC, for the weakest economies.

In his announcement, Richard Fox, head of the Middle East and Africa team in Fitch's Sovereign team, said that the improved local currency rating outlook reflects a swift decline in Israel's public debt ratio, an important economic indicator, which has declined by more than 20% in the past four years, to about 80% in late 2007. This is the lowest ratio Israel has ever achieved.

Fox said that the high ratio had held Israel's rating down for years, while other economic indicators have supported the rating rise for some time now. Fitch notes that the ratio is still considered high. It estimates that Israel will continue to decrease this ratio over the coming year, in spite of an expected slowdown in economic growth due to the influence of global trends.

Fitch believes that Israel should seek a lower public debt ratio because of its exposure to security instability. After the ebb in Israel's economy that began in 2001-2002 due to the intifada, the economy experienced impressive growth between 2003- 2007, by virtue of structural changes and reforms that it adopted, said Fitch.

The rating agency claims that Israel ended 2007 with no budget deficit for the first time in its history (an incorrect claim, since Israel has wound up fiscal years with surpluses in the past).

Fitch is projecting economic growth of just 3.5% in 2008, while the Bank of Israel is expecting growth rates of 3.6% - 4.4%.

A number of economic indicators demonstrate capabilities exceeding an A rating, Fitch says. Personal income in Israel, for instance, is on the rise, even exceeding income levels in many countries with an -AA rating.

In reference to Israel's security threats, Fitch believes that these could have a detrimental affect on Israel's economy, as happened at the beginning of the decade, but the firm noted that Israel continued to experience growth in spite of the Second Lebanon War and rocket fire from Gaza, and that the security wall has also reduced the terror threat and facilitated growth. And while these threats continue, the agency notes, Israel has American economic and military support behind it.

In response to Fitch's announcement, Finance Minister Roni Bar-On said that "this is additional proof that the economic policy undertaken by the government has placed Israel at the forefront with OECD nations." Bar-On emphasized the importance of maintaining fiscal discipline, especially budget deficit targets and government spending.

"While maintaining spending limits and decreasing the debt ratio, the Israeli economy is presenting impressive economic results that reflect its resilience" Bar-On said.

He promised that the government would continue to implement growth-supporting policies and economic reforms aimed at making the economy more efficient. Treasury accountant general Shuki Oren said that Fitch's decision is an important message to investors in Israel, and reflects its economic strength and the value of its government bonds.