November 28, 2017 / 12:43 PM / 2 years ago

Fitch Affirms Israel at 'A+'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, November 28 (Fitch) Fitch Ratings has affirmed Israel's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A+' with a Stable Outlook A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Israel's IDRs balance strong external finances, robust macroeconomic performance and solid institutional strength against a government debt/GDP ratio that is high relative to peers and ongoing political and security risks. Israel's external balance sheet remains strong. Israel has returned annual current account surpluses each year since 2003, underpinned by rapid expansion of services exports (related to the high-tech sector) and the start of gas production. Fitch forecasts current account surpluses to persist in 2017-19, albeit at lower levels, averaging 3% of GDP. There has been further accumulation of foreign exchange reserves, which reached USD111.3 billion in October 2017 (about a year of current external payments), up from USD98.5 billion at end-2016.. Fitch expects Israel's net external creditor position to be 45.5% of GDP in 2017, an improvement from 35.1% in 2014 and 23% in 2008. This is significantly stronger than the 'A' median score and is also stronger than the 'AA' median. Fitch's international liquidity ratio for Israel has also continued to show strong and consistent improvement. Further gas sector development will lend additional support to the external balance sheet. Production at the offshore Tamar gas field, which commenced in 2013, has reduced the need for gas imports. The regulation and final investment decision are now in place for the larger nearby Leviathan gas field. The controlling consortium, which has agreed a number of supply contracts, is aiming for production to start in 2020. Israel's public finances remain a weakness relative to 'A' category sovereigns, despite a trend of improvement. The 2017 central budget deficit is likely to be less than 2% of GDP and the smallest since 2008, in what will be the third consecutive year of significant budget over-performance. The improvement in 2017 stems from a number of larger than expected one-off revenues, which the MoF estimates at NIS17 billion for the year so far. We forecast that the 2018 central budget deficit will widen to the target of 2.9% of GDP. The MoF expects 2018 spending to be in line with the budget, whereas projections for largely flat revenues are realistic given the outperformance in 2017 and the impact of tax cuts introduced for the 2017-18 two year budget. We expect the government debt/GDP ratio, which has declined markedly during the last decade, to fall again in 2017, to less than 62% (end-2007: 74.6%, end-2003: 95.2%). However, we forecast that the downward trend will stop in 2018-19 on the basis of wider deficits and slightly slower growth. This ratio will therefore remain some way above the peer median of less than 50%. Other features of public debt are fairly favourable. The share of external debt is low, declining to less than 8% of GDP in 2016 from 20% of GDP in 2006, and the government is gradually lengthening the maturity profile. Israel benefits from high financing flexibility. It has deep and liquid local markets, good access to international capital markets, an active diaspora bond programme, and US government guarantees in the event of market disruption. Israel's ratings will continue to be constrained by political and security risks, but its credit profile has shown resilience to periodic conflict and political shocks over an extended timeframe. Conflicts with military groups in surrounding countries and territories flare up intermittently and can lead to increased spending commitments or be damaging to economic activity (despite Israel's improved defence capabilities). Israel is concerned by what it perceives as the growing influence of Iran in neighbouring Syria and Lebanon. There is a persistent risk of another conflict with Hizbollah, although there has not been a clash since 2006 and both sides would suffer losses. There has been no progress towards peace between Israel and the Palestinians. Fitch believes prospects for a realistic peace process remain bleak. Domestic politics can be turbulent, with coalition governments often not lasting their full term. None of the coalition parties currently has a clear incentive for elections, but relations are fractious and could suddenly precipitate a new vote, for example, in the context of the next round of budget discussions in 2018. The prime minister, Benjamin Netanyahu, remains under pressure over a number of ongoing police investigations. Five-year average real GDP growth is slightly stronger than rating category peers and growth volatility has been lower. Growth will be slower in 2017 than 2016 (when there was a one-off boost related to vehicle purchases), but will remain robust at around 3%. GDP growth has been slowing in recent years, notwithstanding the 2016 performance. Annual growth averaged 3.3% in 2012-2016, compared with 4.5% in 2004-2011, due in part to slower working-age population growth, less productive additions to the labour force, sluggish world-trade and competitiveness challenges. The government is seeking to enact structural reforms to improve the business environment, as well as boosting labour market participation. In the medium term, rising gas production and the start of gas exports will support growth. Inflation has returned to positive territory for most of 2017, after being negative in 2015-16, owing to higher rents and commodity prices, the elimination of one-off factors and robust domestic demand. The strength of the shekel, especially against the US dollar, has been a disinflationary force. We expect inflation to average no more than 0.3% in 2017, but it could nudge back into the lower-end of the Bank of Israel's 1%-3% target range in 2018. Further one-off administrative measures by the government to reduce the cost of living could yet slow this process. Israel's well-developed institutions and education system have led to a diverse and advanced economy. Human development and GDP per capita are above the peer medians, and the business environment promotes innovation, particularly among the high-tech sector. However, Doing Business indicators, as measured by the World Bank, have slipped below peers. The government also faces socio-economic challenges in terms of income inequality and social integration. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Israel a score equivalent to a rating of 'A+' on the Long-Term Foreign-Currency (LT FC) IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - Structural features: -1 notch to reflect political and security risks, which could have significant negative effects on the economy and public finances. - External finances: +1 notch to reflect the fact that Israel's strong net external creditor position relative to peers is not captured in the SRM. Further gas-sector development should support Israel's external balance sheet over the medium term. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to positive rating action are: - Significant further progress in reducing the government debt/GDP ratio. - Sustained easing in political and security risks. The main factors that could, individually or collectively, lead to negative rating action are: - Sustained deterioration of the government debt/GDP ratio, either through widening fiscal deficits or a structural decline in GDP growth. - Serious worsening of political and security risks. - Worsening of Israel's external finances, for example, due to a loss of export competitiveness. KEY ASSUMPTIONS Fitch assumes regional conflicts and tensions will continue. The tolerance of the rating depends on the economic and fiscal implications of any conflict. Fitch does not assume any breakthrough in the peace process with the Palestinians or a prolonged serious deterioration in domestic security conditions. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'A+'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1+' Short-Term Local-Currency IDR affirmed at 'F1+' Country Ceiling affirmed at 'AA' Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'A+' Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'A+' Contact: Primary Analyst Toby Iles Director +852 2263 9832 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Krisjanis Krustins Associate Director +852 2263 9831 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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