International rating agency Fitch Ratings has assigned a long-term foreign currency rating of 'A-' ('A minus') to the state of Israel's $750 million ten-year bond, issued June 10. The outlook on Israel's ratings remains negative.
Fitch affirmed Israel's long-term foreign currency rating, with a negative outlook, in October last year, at the same time as the long-term local currency rating was downgraded to 'A'. This reflected the fact that the clear deterioration in public finances since 2000 had not been reflected in external financial indicators.
Thus, whilst the nominal general government deficit is estimated to have reached over eight percent of Gross Domestic Product (GDP) in 2002 and public debt rose to 105 percent of GDP, the current account deficit remained a modest two percent of GDP, overall net external debt continued to decline and public external debt was stable.
Public finances remain the main pressure point on the ratings and these have deteriorated anew this year. Events last year showed how weakening public finances could trigger exchange rate pressure and higher inflation and interest rates, and hold back domestic recovery.
In this way, Israel's high debt and deficit levels seriously constrain the government's room for maneuver in the area of macroeconomic policy. Failure to stem the deterioration in public finances would threaten a repetition of last year's events and jeopardize what presently seems likely to be only a muted recovery this year at best.
Fitch therefore announced it regards the recently approved fiscal package as an important step in the right direction, which will help stem the widening of the deficit seen earlier this year. The agency is also encouraged by the renewed emphasis on structural reform, which in present circumstances is one of the few policy levers the government has to stimulate growth.
Nevertheless, progress in the fiscal area in coming months remains paramount. Despite the latest package, the budget deficit will overshoot the official target again this year, although the dramatic fall in inflation means that the overall nominal deficit (Fitch's preferred measure) could fall and debt should rise more slowly.
There is no precise number for these variables that will trigger or avert a rating downgrade. Of more importance is that fiscal policy helps, as much as possible, to foster conditions for recovery, which in the Israeli context means keeping downward pressure on the deficit and debt in order to facilitate the process of interest rate reduction currently underway.
In this regard, as well as monitoring near term fiscal outturns and the response to any renewed shortfalls, Fitch also looks for a 2004 budget based on realistic assumptions that acts as a starting point for a credible medium term deficit and debt reduction strategy.
This will be all the more challenging in a low growth/low inflation environment so any boost to growth prospects from progress with the "road map" or faster global recovery would be beneficial. A further review of Israel's ratings is scheduled later this year. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
