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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
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
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.
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Senior Vice President
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD - Sovereign Risk
Sovereign Risk Group
Moody's issues annual credit report on Israel
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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