Contact: Paul Rawkins, London, Tel: +44 (0) 20 7417 4239.
Source: Bloomberg
Fitch Ratings-London-18 March 2009: Fitch Ratings has today
assigned the State of Israel's upcoming 10-year USD sovereign
bond an 'A' rating. The rating is in line with Israel's
Long-term foreign currency Issuer Default Rating (IDR) of 'A'
which has a Stable Outlook.
"The economy has deteriorated rapidly since the beginning of
the year, largely reflecting a collapse in exports which, in
turn, has fed through to a steep fall in tax revenues. This
sovereign bond issue, the first since 2006, comes on the back
of a widening state deficit that could see the broader general
government deficit approach 7% of GDP in 2009," says Paul
Rawkins, Senior Director in Fitch's London-based Sovereigns
team.
Fitch expects real GDP to contract by as much as 1.5% of GDP in
2009, outstripping the recession of 2001-02, when the economy
buckled under the weight of the collapse of the dot-com boom
and the second Intifada. With fiscal policy constrained by high
levels of public debt and slow progress in formulating a new
coalition government, the onus of policy stimulus has fallen on
the Bank of Israel. The base rate has been cut to 0.5% and may
yet fall further, even as the Bank engages in less orthodox
monetary policy measures, coupled with intermittent
intervention in the foreign exchange market, to contain the
appreciation of the shekel and build international reserves.
Israel's current account balance has remained in surplus,
although it contracted to around 1% of GDP in 2008 from a peak
of 5.6% in 2006, while reserves stood at USD40.6bn in February
2009, up from USD28bn a year previously.
The adoption of rules-based fiscal policy in the wake of the
last recession has served Israel well; limits on the growth of
public expenditure and a ceiling on the state deficit
facilitated a contraction in general government debt to 77% of
GDP at end-2008 from a peak of 102% in 2003. While this ratio
remains high relative to the peer group median of 35%, it is
not the most extreme (similarly rated Greece exceeds 90% of
GDP). Moreover, other indicators in Israel, notably per capita
income, governance and the net external creditor position, have
long matched or exceeded the 'A' category median. Nonetheless,
such elevated levels of public debt limit the government's
ability to mount a fiscal stimulus programme to counter the
impact of the global economic downturn on the domestic economy.
Given the likely severity of the recession, Fitch acknowledges
that the deficit ceiling will be breached and the debt ratio
will rise. Based on current trends, Ministry of Finance
officials are projecting state deficits of 5.5%-6% of GDP in
2009-10, compared to 2.1% in 2008. "Budget deficits of this
magnitude would presage a general government debt/GDP ratio in
the region of 90% by end 2010, potentially undermining
sovereign creditworthiness, should this upward spike prove to
be more than temporary. Such considerations underline the need
for renewed commitment to long-term debt sustainability from
the incoming government," says Mr Rawkins.
The authorities expect to meet around 40% of net fiscal
financing needs of USD9.6bn in 2009 from foreign borrowing. In
addition to the proceeds from sovereign bond issuance, the
Jewish diaspora's State of Israel bonds remain a reliable
source of external financing, while borrowing under the US
guarantee programme does not expire until 2011. While it is
unclear whether new fiscal rules will apply to the 2009 budget,
which must be approved within 45 days of the new government
taking office, Fitch notes that Prime Minister-designate
Benjamin Netanyahu was the architect of the most recent phase
of fiscal consolidation. Given an appropriate fiscal framework
going forward, Israel's powerful public debt dynamics should
also start to reassert themselves as the economy begins to
recover.
