In its annual report on Israel, Moody's Investors Service says the country's A2 foreign and local currency ceilings reflect ongoing tensions with the Palestinian Authority (PA), the country's three-year old economic downturn, and a number of positive factors.
"The aggravated geopolitical variable is already factored into the ratings, which otherwise would be much higher," says Moody's Vice President Jonathan Schiffer, author of the report.
"Current events notwithstanding, the outlooks for all Israeli ratings are stable, given the current regional military balance and the strong external financial support that would be available in a crisis from the Jewish Diaspora and from the US government."
Despite Israel's fragmented politics and often-unwieldy coalition governments, the stable outlook has also been supported by the willingness of current and recent Israeli governments to trim fiscal expenditures and budget deficits to maintain macroeconomic stability, says the Moody's report.
Since 2001, Israel has been mired in the deepest recession in its history. "This has not, however, undermined foundations laid in prior years in which low growth, high inflation, and substantial regulatory and bureaucratic intervention gave way to a more market-oriented economy," says Schiffer.
The good years of the second half of the 1990s also brought new competition into various public-sector activities that led to privatization and fiscal tightening that allowed the government to begin to reduce its large domestic debt burden. "Global economic weakness and the high-technology downturn that followed have greatly affected economic performance - and budgetary revenues - but are cyclical in nature," says Schiffer. "The current growth of the fiscal deficit is seen as a temporary exception to the general pattern of tight fiscal policy rather than as a harbinger of a new policy trend."
Moody's anticipates that the recently re-elected coalition government led by Prime Minister Ariel Sharon will build on last year's tax reform and continue a proactive approach to structural reform of fiscal expenditures in order to balance against challenges on the revenue side. Israel's liquidity position has not deteriorated, and the government can service the rising domestic debt of recent years without difficulty.
"The composition of the new government will determine the pace of public sector reforms and relations with the Palestinian Authority," says Schiffer. He added that events in Iraq will almost certainly have an impact on Israeli politics and the economy. "A war will prolong economic hardships in Israel but the country would ultimately benefit from normalization of relations with Iraq," says the analyst. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
