Fitch Affirms Israel at 'A'; Outlook Positive

Fri May 23, 2014 12:03am EDT

(The following statement was released by the rating agency) LONDON, May 23 (Fitch) Fitch Ratings has affirmed Israel's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A' and 'A+', respectively. The Outlook on the Long-term foreign-currency IDR is Positive and the Outlook on the Long-term local currency IDR is Stable. The issue ratings on Israel's senior unsecured foreign and local currency bonds have also been affirmed at 'A' and 'A+', respectively. The Country Ceiling has been affirmed at 'AA-' and the Short-term foreign currency IDR at 'F1'. KEY RATING DRIVERS Israel's IDRs reflect the following key rating drivers: Fiscal consolidation remains on track. The central government deficit narrowed to 3.2% of GDP in 2013 compared with a budgeted 4.3% of GDP and a 2012 deficit of 3.9% of GDP, due to tightening measures and various one-off factors. Revenue strength resulted in a small surplus in 1Q14, compared with a deficit of 0.5% of GDP in 1Q13. Political commitment to consolidation appears strong and a fiscal rule has been tightened. Fitch forecasts a further narrowing of the central government deficit to 2.5% of GDP in 2015. Debt is relatively high, at 67.4% of GDP at end-2013 compared with the 'A' median of 52.3% of GDP, but it is forecast to stay on a downward trend. Financing flexibility is high, with deep and liquid local markets, access to the international capital market (including a euro-denominated issuance in January 2014), and an active diaspora bond programme and US government guarantees in the event of market disruption. Debt management is also a relative strength. The external balance sheet is stronger than peers. The start of gas production has caused a structural improvement in the balance of payments that will support continued current account surpluses, which are forecast to average 2.6% of GDP over 2014 and 2015. Large inflows of foreign direct investment (FDI) and intervention in the foreign exchange market have also lifted reserves, pushing the net creditor position to a new high at the end of 2013. Growth is faster than peers and is picking up after likely bottoming in 3Q13. Real GDP growth was 3.3% in 2013, but at around 2.6% excluding gas, was the lowest since 2009. Growth is forecast to average 3.5% of GDP in 2014 and 2015. Domestic demand should improve as the impact of fiscal consolidation fades and monetary policy remains supportive. Rising global demand should support export growth despite the impact of currency appreciation, and investment should benefit from greater housing construction. Geopolitical risk is a constraint on Israel's rating. Some neighbouring countries do not formally recognise Israel's existence and there are intermittent conflicts with military groups in surrounding countries and territories. Tensions with Iran are high. The conflict in neighbouring Syria poses risks to Israel and to other neighbouring countries that could impact Israel, although direct spill-over has so far been minimal. Israel's strong and well-developed institutions and education system have led to a diverse and advanced economy. Human development indicators and GDP per capita are high and the business environment promotes innovation. Buoyant hi-tech sector growth has led to service exports averaging over 10% during the past three years, despite currency strength, and net inflows of FDI averaged 2.6% of GDP over 2012 and 2013, almost double the peer median. Steps are being taken to tackle structural weaknesses. A law has been passed that will reduce concentration of ownership in the private sector. Increasing labour force participation from ultra-orthodox men and Arab women, partly in response to government initiatives, is holding down wage inflation. In both areas there is significant scope for further progress. RATING SENSITIVITIES The Positive Outlook reflects the following risk factors that may, individually or collectively, result in an upgrade: - A sustainable narrowing of the fiscal deficit consistent with fiscal rules. - Continued progress in reducing the debt/GDP ratio towards the category peer median level. - A sustained easing in geopolitical risk. The current Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a downgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include: - A sustained deterioration of the debt/GDP ratio. - A serious worsening of geopolitical risk. KEY ASSUMPTIONS A high level of geopolitical risk is factored into Israel's rating. Current regional conflicts are assumed to continue, but their impact on Israel not to worsen materially. Fitch does not expect a military conflict between Israel and Iran. Fitch assumes civil war in Syria will continue without seriously destabilising neighbouring states or directly spilling over into Israel. Fitch does not assume any breakthrough in the peace process with the Palestinians or exclude the possibility of renewed conflict with Hamas in Gaza. Fitch assumes that the ruling coalition will hold together and remain committed to lowering the deficit over the forecast period. Gas supply and associated revenue streams are assumed to flow in line with the authorities' assumptions. Production at Tamar is expected to continue uninterrupted. Fiscal and export revenues from gas will be low during the forecast period. Fitch assumes that house price inflation will ease and that house price movements will not destabilise the financial sector. Contact: Primary Analyst Paul Gamble Director +44 20 3530 1623 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Matteo Napolitano Director +44 20 3530 1189 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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