Standard & Poor’s Ratings Services has assigned its ‘A-‘ long-term senior unsecured debt rating to the State of Israel’s US$750mn, 10-year global bond issue. At the same time, Standard & Poor’s affirmed its ‘A-/A-1’ foreign currency and ‘A+/A-1’ local currency ratings on Israel . The outlook is negative.
“Backed by a clear majority in the Knesset (parliament), policy-makers have made substantial progress in correcting structural weaknesses in the budget and pursuing economic reform,” says Standard & Poor’s credit analyst Konrad Reuss.
The government’s recent economic package pruned expenditure by 2% of GDP. Measures within the programme including an 8% average cut in public sector wages, a freeze on state benefits, and pension reforms are expected to underpin a downward trend in the fiscal deficit (to 3% of GDP in 2005) and decline in the debt burden (to 104% of GDP by year-end 2005). In the near term, however, weak revenue growth will result in a further increase in the budget deficit in 2003, up to about 5% of GDP, which is in excess of the budget target of 3%.
The government’s economic programme also underpins prospects for further liberalisation. Deregulation of the electricity sector (a state monopoly) has been approved, and telecommunications are to be further liberalised. Privatisation of El Al, the national airline, is now well advanced, while further sales of state assets have been signalled. In addition, pension reforms, which have wrested control of funds from labour unions and will eliminate actuarial deficits, are intended to deepen capital markets.
“The negative outlook on Israel reflects significant implementation risk associated with the government’s economic programme and the internationally sponsored ‘road map’ aimed at resolving the Israeli-Palestinian conflict,” says Reuss.
Even modest slippage in the implementation of the package could quickly result in a further period of unsustainable fiscal deficits, precipitating a rapid increase in the public debt burden, which remains one of the highest among rated sovereigns. In addition, faltering efforts with the road map could prolong economic stagnation, placing further pressure on government revenues and necessitating further cuts in expenditure. Conversely, full and timely implementation of the government’s economic programme would, in the context of progress on the security situation, improve the outlook on the ratings.