Minister of Finance Yair Lapid: “The downgrading of the rating is not surprising. It is a delayed response to the situation which we are presently correcting.”

 S&P sets Israel's ratings at “A+” with a stable outlook

 

(Communicated by the Ministry of Finance)

S&P Rating Agency has reaffirmed the State of Israel’s foreign currency credit rating (2 May 2013). The reaffirmed rating is "A +" with a stable outlook. Simultaneously, S&P has also downgraded the credit rating of Israel’s local currency, equalizing it to Israel’s foreign currency credit rating, “A+”.

The Minister of Finance, Yair Lapid, said that “the downgrading at this time is not surprising. This is a delayed response to the situation which we are presently trying to correct. One needs to look into the mirror and say honestly: 2013 and 2014 are the two years during which we will end the overdraft and in the midst of this correction we will begin to takeoff. We are now modifying the priorities; we will focus on the working population and the cost of living will be reduced. This is the only way in which the economy can grow and continue to maintain its position. We are now taking responsible steps and this responsible policy will continue while I am the Minister of Finance. In a meeting I had yesterday with the Governor of the Bank of Israel he repeated his support for the Finance Ministry’s policy deficit target goal of 3% in 2014 and the expenditure framework prescribed by law."

In addition, the agency noted that the stable outlook represents the current political consensus regarding the reduction of public debt in the face of the current fiscal situation.

In its statement, the rating agency noted that the downgrading of the local currency stems from a deterioration in fiscal performance which was lower than the forecast, unlike the other strong economic data such as: flexible monetary policy and strong external accounts. S&P stated that according to the rating methodology it is not possible to maintain the difference between the local and foreign currency rating when the fiscal policy constitutes a significant restriction on the credit rating.

At the same time, S&P reaffirmed Israel’s foreign currency credit rating at "A+" with a stable outlook. The rating agency declared that the rating reaffirmation indicates a diverse economy and the effect of the discovery of gas on national accounts.

The stable outlook indicates that S&P believes in the government’s ability to deal with the deficit in an appropriate manner for a country with an “A+” rating. They claim that the new government is expected to pass a biennial budget for 2013-2014 this summer, which will include the cuts and tax increases that are expected to reduce the projected deficit. However, the effect of these measures will only be partial since they are to be carried out during 2013, and therefore in the absence of policy changes, the forecast is for a higher deficit than that of 2012. S&P hold the opinion that the average debt to GDP ratio will continue to decrease during the forthcoming years (2013-2016).

With regard to growth, S&P pointed out that the forecast is for an expected medium-term growth of 3.5% and a long range decrease in growth per capita to the level of 1.6%, which is a relatively high growth rate. However, the growth may be impaired by a weakening of exports due to a slowdown in the target countries, especially in Europe, and the appreciation of the Shekel. The decision to establish a Sovereign Wealth Fund, into which a share of the gas income will be channeled, will lessen the danger of appreciation. Another risk to Israel’s economy is the continuing rise in housing prices during the second half of 2012. In this context, S&P noted that they believe that the actions taken by the Bank of Israel in November 2012 will prevent the creation of a bubble in the housing market.

S&P noted that the stance of the country’s external accounts remains strong and they expect a current account surplus of approximately 0.9% of the GDP in 2013.