Standard & Poor's Ratings Services said on Jan. 11 it revised its ratings outlook on the State of Israel to stable from negative, on improving economic and fiscal prospects. At the same time, the A-/A-1 foreign currency and A+/A-1 local currency ratings on Israel were affirmed.
"The revision of the outlook reflects the narrowing of the budget deficit in 2004, prospects for medium-term fiscal consolidation underpinned by the U.S. loan guarantee program, renewed economic growth, and a significant improvement in the balance of payments," says Standard & Poor's credit analyst David Cooling. At the same time, he notes, geopolitical risks have also stabilized, following a reduction in the level of violence, and the prospect of a new Palestinian leadership to reinvigorate the stalled peace process.
In 2004, fiscal results were modestly better than those budgeted. Spending restraint and a stronger-than-anticipated recovery in economic growth enabled the government to meet its deficit target of 4% of gross domestic product. At the same time, the general government debt-to-GDP ratio is forecast to stabilize at 108% of GDP.
Few material changes to economic policy are expected, despite the inclusion of the Labor party in the governing coalition. Israel's economic policy is underpinned by conditions in the recently revised U.S. loan guarantee program, which runs until 2008. The program sets out a clear path of fiscal consolidation and structural reforms.
Prospects for growth have improved, with its composition more evenly balanced between exports and domestic demand. In 2005, real economic growth is expected to remain at almost 4%, reflecting strengthening external demand and a sharp recovery in private consumption and investment.
Agreement by Palestinian groups to observe a ceasefire during the Palestinian Authority elections, coupled with a reduction in the number of terrorist incidents, underpins improvements in consumer confidence and a strengthening of domestic demand. Real GDP is forecast to expand by an average of slightly less than 4% annually over the next five years.
"External vulnerability has declined significantly, and the current account is forecast to remain almost balanced for the foreseeable future, reflecting the recovery in global technology markets, which are a key export sector for Israel," says Cooling.
Net inward foreign direct investment is projected to remain strong, at an estimated 1.8% of GDP in 2004. At the same time, Israel's gross external financing requirement (current-account deficit plus short-term debt, including long-term debt due within a year) is expected to remain comfortable, at 132% of reserves in 2005, down from 142% as recently as 2002.
From Standard & Poor's Ratings Services