International ratings agency Standard & Poor's (S&P's) has revised its outlook on the state of Israel to negative from stable. The revision reflects growing fiscal and economic pressures on Israel as a result of the continued recession and the tense security situation in the country. At the same time, S&P's affirmed its double-'A'-minus/'A-1'-plus local currency and single-'A'-minus/'A-1' foreign currency ratings on Israel.
"Although the emerging global recovery is expected to provide some relief later this year, we rule out a substantial rebound in Israel's economic activity in 2002, due to the persistence of the highly volatile and tense security situation," said S&P's credit analyst Konrad Reuss. "Despite intensifying international pressure, a major breakthrough in the resolution of the security crisis is unlikely in the near future."
The ratings on Israel are supported by its diversified, modern economy. Following the structural changes of recent years, the economy is in a good position to realize its high long-term growth potential, once the security situation improves and the global economy recovers. Israel's credit standing also benefits from a manageable external debt burden and a robust international liquidity position, supported by an effectively free-floating exchange rate.
Security crises such as the current one, however, negatively affect the contribution to growth of confidence-sensitive sectors such as tourism, reduce the country's ability to attract foreign direct investment and complicate the process of fiscal consolidation and economic reforms, especially privatization. The security situation and the effects of the global slowdown have resulted in a protracted recession, with no more than zero Gross Domestic Product (GDP) growth expected this year.
Against this background, the risk of further slippage in the government's fiscal performance is growing. The general government deficit jumped to 4.6 percent of GDP in 2001 from 0.7 percent in 2000. The deficit target of three percent of GDP for 2002 is likely to be overshot due to a renewed revenue shortfall.
As a result, the declining trend in the government's heavy debt burden has been reversed. The public-debt-to-GDP ratio is expected to reach 100 percent in 2002, although the burden is mainly denominated in long-term local currency instruments held by domestic investors. Further fiscal slippage, especially in the context of the current security situation, would also maintain pressure on the exchange rate, raising the risk of broad-based, higher inflation.
Reflecting on the sovereign rating prospects for Israel, Reuss concluded: "The fiscal deficit overruns and public debt increase are putting downward pressure on the ratings. Prospects revolve around the implementation of fiscal measures to contain the deficit in the near term. This would enable the government to return to its medium-term path of fiscal adjustment and sustained debt decline in the context of a well-balanced macroeconomic policy mix. Medium-term rating prospects also hinge on a resolution of the security crisis, without which Israel will not fully reap the benefits of a global economic recovery." — (menareport.com)
© 2002 Mena Report (www.menareport.com)
