April 21, 2016 / 11:51 AM / in 3 years

Fitch Revises Israel's Outlook to Positive; Affirms at 'A'

(The following statement was released by the rating agency) HONG KONG/LONDON, April 21 (Fitch) Fitch Ratings has revised the Outlook on Israel's Long-term foreign currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'A'. Fitch has also affirmed the Long-term local currency IDR at 'A+', with a Stable Outlook. The issue ratings on Israel's senior unsecured foreign- and local-currency bonds are affirmed at 'A' and 'A+' respectively. The Country Ceiling is affirmed at 'AA-' and the Short-term foreign-currency IDR at 'F1'. KEY RATING DRIVERS The revision of the Outlook on the Long-term foreign currency IDR reflects the following key rating drivers: Israel's external finances continued to strengthen in 2015. The current account surplus expanded to 4.6% of GDP and the Bank of Israel's (BoI) stock of foreign reserves climbed to USD90.6bn (10.9 months of current account payments). Israel's net external creditor position improved to 43% of GDP in 2015 from 35.4% in 2014 and on a longer horizon from 27.4% in 2008 when Fitch last upgraded Israel's IDRs. The net external creditor position is double the 'A' median and slightly above the 'AA' median. While the overall recent performance of exports of goods and services has been weak, Fitch expects the current account surplus to continue in 2016-17. There has been a concerted improvement over a number of years in reducing the government debt to GDP ratio. This has been a policy priority for successive Israeli administrations, leading to a decline in the ratio to 64.9% at end-2015 from 74.6% at end-2007 and 95.2% at end-2003. Nevertheless, it remains above the peer median of 44.6%. Israel's IDRs and the Stable Outlook on the local currency IDR also reflect the following key rating drivers: Fitch forecasts the central budget deficit to widen to 2.9% of GDP (equivalent to around 3.5% on international standard general government definition), from 2.1% in 2015, which was the smallest since 2008. The low deficit in 2015 narrowed on the back of robust revenue growth and because spending was constrained in the absence of a budget until mid-November. The 2016 budget target is above that specified in the prior fiscal rule and represents a loosening of fiscal policy. Fitch's budget deficit projections imply the government debt-to-GDP ratio will broadly stabilise in 2016-17. Although government debt-to-GDP remains above the peer median, 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. The structure of debt is also favourable. Foreign currency debt-to-GDP, for example, has fallen to 8.7% in 2015 from 14% in 2008. The low level of foreign currency debt helps to explain why the Outlook on the local currency IDR has not been revised to Positive, as the agency envisages an equalisation of the foreign and local currency IDRs in the event that the former is upgraded. Israel's ratings 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. Frequent yet uncoordinated attacks by young Palestinians and Arab Israelis have continued with varying intensity since September 2015. Although these do not currently amount to a third intifada, the attacks reflect the lack of progress towards peace between Israel and the Palestinians. The prospects for a realistic peace process remain bleak. Although Israel's borders are currently relatively quiet, conflicts with military groups in surrounding countries and territories flare up intermittently and can be damaging to economic activity. The ongoing war in Syria poses risks to Israel and to other neighbouring countries that could impact Israel, although direct spillover has so far been negligible. The implementation of the nuclear deal between Iran and world powers will remain a concern for Israel. Domestic politics can be turbulent, with coalition governments often not lasting their full term. No party in the coalition currently seems to have an incentive for the government to fall and precipitate new elections, but the coalition remains vulnerable given its one-seat majority. The next test for the government will be the 2017-18 budget process later this year. Production at the Tamar gas field since 2013 has obviated the need for gas imports, thus benefiting the external finances. However, the development of the larger Leviathan field remains uncertain, following the Supreme Court's decision in April 2016 not to approve the proposed gas framework. The project was not factored into Fitch forecasts, so delays do not affect our external and fiscal projections. If Leviathan does go ahead Israel could become a gas exporter in the medium term. GDP growth has slowed in recent years. In 2012-15 annual growth averaged 2.8%, compared with 4.5% in 2004-11. The explanation for this relates to a number of factors, including slower growth in the working-age population, less productive additions to the labour force, sluggish world trade and competitiveness challenges. In response, the government is seeking to enact a number of structural reforms to improve efficiencies in some markets and the business environment overall as well as boosting labour market participation. Inflation was negative in 2015 due to lower commodity prices, domestic currency strength and measures to stimulate greater competition. Fitch expects robust domestic demand and the dropping out of one-off factors to push inflation into the lower end of the BoI's 1%-3% target range in 2017. Israel's well-developed institutions and education system have led to a diverse and advanced economy. Human development and GDP per capita are well 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 a number of socio-economic challenges in terms of income inequality and social integration. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to a positive rating action are: -Sustained strength of the external balance sheet. -Improvements in the business environment that support investment and growth. -Further progress in reducing the government debt-to-GDP ratio. -A sustained easing in political and security risks. The main factors that could, individually or collectively, lead to a negative rating action are: -A sustained deterioration of the government debt-to-GDP ratio. -A serious worsening of political and security risks. -A worsening of Israel's external finances, for example due to a loss of export competitiveness. KEY ASSUMPTIONS Current regional conflicts and tensions are assumed to continue, but their impact on Israel is not expected to worsen materially. Fitch does not expect a military conflict between Israel and Iran. Renewed conflict with Hamas in Gaza is possible, despite a serious degradation of the latter's military capacity. The tolerance of the rating and Outlook 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 pro-longed serious deterioration in domestic security conditions. 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 Ed Parker Managing Director +44 20 3530 1176 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 20 Aug 2015) here Sovereign Rating Criteria (pub. 12 Aug 2014) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1002952 Solicitation Status here Endorsement Policy here ail=31 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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