Jerusalem, 23 September 1999

Investment Banks Evaluate Israel’s Credit Rating

(Communicated by the Finance Ministry Spokesman)

Morgan Stanley Dean Witter and Salomon Smith Barney reports on Israel issued this month – in the wake of the May election, recent Government decisions on the State budget and structural reform, and the Sharm a-Sheikh accord – both conclude that Israel is deserving of a credit rating on par with the world’s most stable economies.

The Salomon Smith Barney report – which equates Israel’s developed industrial economy with those of similar, AA-rated western European nations – offers praise for the commitment of Israel’s political, economic and academic leadership to prudent macro-economic policy and structural reform, as well as for the quality of education and the labor force in Israel.

At the same time, the report continues, the limitations imposed on Israel’s credit rating derive from the geopolitical situation in the Middle East, and from the need for continued fiscal restraint and deficit reduction. According to Salomon Smith Barney, Prime Minister Barak’s commitment to a new era in the peace process is promising, and substantive progress toward peace will likely improve Israel’s international credit rating in the future.

The report determines that, for the third consecutive year now, Israel has not realized its estimated growth potential of 4-5%, anticipating growth for 1999 at between 2-2.5%. This slowdown is attributed to a decline in the rate of immigration, the global economic recession and financial crises; the stalemate in the peace process, and tight fiscal and monetary policies. The report adds, however, that the external trends which have adversely affected the Israeli economy are now being reversed, which should exert a positive influence on the economic growth rate. In this vein, Salomon Smith Barney cites the recovery in Asia and Europe, as well as the fact that global financial markets are now more robust and healthy than last year.

The report expects that Israel’s balance of payments deficit will be relatively small in 1999, at about 1% of GDP. In addition, industrial exports have performed well, and declared foreign investments during the first half of 1999 totaled $1.7 billion. Combined with an increase in Israel’s foreign currency reserves, these factors have contributed to Israel’s strong external liquidity position.

The Salomon Smith Barney analysts believe that Government decisions concerning the deficit and inflation targets for 2000 will prove "comfortable" for international credit rating agencies, and that – if Israel’s economic parameters approach the standards of its main western European and American trading partners – its international credit rating may be upgraded in within the next two years.

The Morgan Stanley Dean Witter report views Israel’s economy worthy of a higher credit rating than currently assigned by rating agencies. The investment bank emphasizes Israel’s commitment to reducing government intervention in the economy and to stable macro-economic policy. Furthermore, according to the report, substantive progress in the peace process will be "beneficial’ to Israel’s international credit rating.

The report suggests that Israel’s relations with the United States and with Diaspora communities offers "additional comfort" and forecasts a 2.3% growth rate for 1999, an inflation rate under 4% and a budget deficit of approximately 1% of GDP. Accordingly, the report predicts that the Government of Israel should experience no difficulty in financing the deficit. In the intermediate term, Morgan Stanley Dean Witter believes that a 4-5% rate of growth for the Israeli economy is a realistic target.