In its announcement Fitch noted that the rating ratification reflects Israel’s strong institutions and macroeconomic performance; however the large expected budget deficit was also mentioned
The Fitch Rating Agency reaffirmed Israel’s Credit Rating today at “A” with a stable outlook. In its announcement, Fitch noted the strength of the Israeli economy, the relatively high GDP per capita compared to its peers, the quality of the education system and the business environment which supports innovation. The Israeli economy enjoys a high economic growth, with natural gas contributing to a growth rate of 3.7% in 2013, a relatively high figure compared to 2012. The gas discoveries will enable the stabilization of energy prices and will reduce the need to import energy products. Consequently the country is expected to return to a balance of payments surplus in 2013 and to continue improving its external accounts.
Fitch noted the management of the government debt and the state’s ability to raise funds through an extensively diverse domestic market which reduces the need to raise capital in the international markets. Nonetheless, Israel does have the ability to raise capital from a number of external sources.
On the other hand, Fitch noted that the political system in Israel includes a new coalition that has yet to prove itself. In addition, Israel is located in an insecure environment with high geo-political risk and unstable relations with its neighbors that cause high defense expenses which could impair economic activity. In addition, Fitch noted the size of the government debt relative to the GDP, which is significantly higher than Israel’s peers, and is not expected to decrease due to the large government deficit resulting from a decrease in tax revenues and the pressure to increase expenses.
With regard to the budget deficit, Fitch noted that the current government has set a target to reduce the deficit and it will have to handle pressures to increase expenses. A rating downgrade could also result from deterioration in the geo–political situation, including an attack on Iran, or as a result of a continuous decline in fiscal discipline and an increase in the ratio of public debt to GDP.
Fitch notes that they will consider raising Israel’s credit rating if the government’s fiscal discipline results in further reduction of the debt to GDP ratio, down to a level of 60%, or if there is a significant improvement in the geo – political situation.