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Announcement:

Moody's issues annual credit report on Israel

Global Credit Research - 03 Sep 2012

New York, September 03, 2012 -- In its annual credit report on Israel, Moody's Investors Service says that Israel's A1 government bond rating and stable outlook are underpinned by the country's high economic, institutional and government financial strength, but the rating is constrained by significant social and political challenges, which lead to moderate susceptibility to event risk.

The rating agency's report is an annual update to the markets and does not constitute a rating action. Moody's determines a country's sovereign rating by assessing it on the basis of four key factors -- economic strength, institutional strength, government financial strength and susceptibility to event risk -- as well as the interplay between them.

Israel's high economic strength is supported by its relatively high GDP per capita (US$31,200 in 2011) and its economic resilience, which has been illustrated in recent years during frequent economic and political shocks. However, this resilience is being challenged once again by the ongoing euro zone debt crisis and the concurrent slowdown in the global economy. Moody's points out that the Israeli economy's pace of recovery following the global recession in 2009 has slowed as the contribution of net exports became a drag on the economy last year for the first time since 2007, a trend continued into the first quarter of this year. Capital inflows have diminished and the current account surplus has disappeared in 2012, the latter partly a result of the need to replace Egyptian gas imports following that country's revolution. As a consequence, the real GDP growth rate dropped to 3% in H1 2012 from an average of 4.8% during 2010-11. Nonetheless, the country's specialised export sector is well-positioned to rebound quickly should the global environment normalise.

While Moody's currently assesses Israel's institutional strength as high, based on the government's effectiveness, rule of law and transparency, political instability and corruption stand out as important weaknesses relative to rating peers in the A rating range. Failure to effectively address these issues could eventually jeopardise the country's high institutional strength assessment. Moreover, the recent break-up of a brief "national unity" government prevented the government from making progress on a number of significant issues, such as the renewal of peace negotiations with the Palestinians. The break-up increases the likelihood of an early election being called, which would probably delay the 2013 budget, as well as signalling little appetite to make major progress on any of the other political reform fronts.

Moody's assesses Israel's government financial strength as being high thanks to the improving debt trajectory, the favourable debt composition and the comfortable debt service schedule. However, volatile Israeli domestic politics and regional political upheavals have delayed fiscal corrections that would have kept the budget deficit on target the last two years, suggesting that the government's commitment to fiscal discipline is waning as growth has slowed. Additional spending has been allocated to address the acute problems in the housing sector, related primarily to affordability. Other social spending hikes in response to last year's widespread popular demonstrations and secular increases, mainly associated with demographic trends, will require strict prioritisation to conform to the fiscal rule that sets a ceiling on the growth of government spending.

The rating agency says that government has eased its fiscal strategy substantially for the coming years, after having missed its deficit targets in both 2011 and 2012 by widening margins. That being said, a standalone ILS14 billion tax package approved in August included mainly tax-raising measures that will narrow the deficit this year and next. The 2013 budget may be delayed owing to the likelihood of early elections being called before the end of the year. Going forward, the sustainability of the public finances also will depend upon how well the government manages the revenue from natural gas sales, in particular whether it is able to restrict the share of gas revenues used to finance current spending in order to build up a sovereign wealth fund.

Moody's judges Israel's susceptibility to event risk as moderate based on the political risks facing the country, both domestic and external. The Arab Spring revolutions have ironically created problems for Israel, for whom the 1979 peace treaty with Egypt has been critical to its security framework. The violent uprising in Syria and concerns about Iran's nuclear programme have led the government to maintain a high level of defense spending, representing about 15% of total government expenditure. However, the negative impact of the cutoff of Egyptian gas supplies on the Israeli balance of payments will be more than offset as Israel's own gas production increases substantially between 2013 and 2016.

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Kristin Lindow
Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's issues annual credit report on Israel
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