Fitch Ratings has upgraded Israel’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to “A+” from “A”. The Outlooks on the long-term IDRs are Stable. The issue ratings on Israel’s senior unsecured Foreign- and Local-Currency bonds are upgraded to “A+” from “A”. Fitch has also upgraded the Short-Term Foreign- and Local-Currency IDRs to “F1+” from “F1” and the Country Ceiling to “AA” from “AA-“.
The credit rating agency says that it assumes regional conflicts and tensions will continue, but that their impact on Israel will not worsen significantly. Thereby, Fitch now comes into line with Moody’s and Standard & Poor’s on its Israel ratings.
Fitch says that the upgrade of Israel’s IDRs reflects the fact that Israel’s external balance sheet has continued to strengthen. The country has returned annual current account surpluses each year since 2003, and in 2015 posted a record surplus of 4.6% of GDP. The current account surplus narrowed by around 20% year-on-year in the first half of 2016, to USD 6.3 billion, because of a worsening trade balance. Nevertheless, there has been further accumulation of foreign-exchange reserves, which had reached USD 98 billio by end-October 2016 (almost 12 months of current external payments), from USD 90.6 billion at end-2015. Fitch expects current account surpluses to persist in 2017 and 2018.
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Fitch expects Israel’s net external creditor position to be 43% of GDP in 2016, an improvement from 35.1% in 2014 and 23% in 2008 when we last upgraded Israel’s IDRs. This is four times the ‘A’ median, and in line with the ‘AA’ median. Fitch’s international liquidity ratio for Israel has also continued to improve strongly.
Fitch comments that “Further gas sector development will lend additional support to the external balance sheet. Production at the Tamar gas field off the coast of Israel, which commenced in 2013, has reduced the need for gas imports. The government approved an amended natural gas framework in July 2016, thus providing the regulatory green light for the development of the larger near-by Leviathan gas field.”
Fitch also notes a sustained reduction in Israel’s government debt/GDP ratio to 63.9% at end-2015 (end-2007: 74.6%, end-2003: 95.2%).
“Despite the fall in its public debt/GDP ratio, Israel’s public finances remain a weakness relative to ‘A’ category sovereigns. The 2017-2018 two-year budget is expansionary, and we expect government debt/GDP to remain fairly level in 2016-2018 rather than continuing a downward path, ” Fitch says, adding, “Israel’s ratings will continue to be constrained by political and security risks, but its credit profile has shown resilience to periodic conflict and political shocks over an extended timeframe.”
On economic growth, Fitch comments, “GDP growth is on a par with peers, but has slowed in recent years. Annual growth averaged 3.1% in 2012-2015, compared with 4.5% in 2004-2011, due in part to slower working-age population growth, less productive additions to the labor force, sluggish world-trade and competitiveness challenges. In response, the government is seeking to enact structural reforms to improve efficiencies in some markets and the business environment overall, as well as boosting labor market participation.”
