Fitch warns over weakness of Israel’s public finances

26 Apr 13
Fitch has reaffirmed Israel’s single A credit rating and stable outlook, but warned that high debt levels present a threat.

Israel’s debt-to-gross domestic product ratio at the end of 2012 was 72.3%, around double the median for countries with an A rating, the agency said in a note issued yesterday.

While this is expected to fall slightly this year and next, cutting the debt will be hampered by large deficits caused by revenue shortfall and increased spending pressures, Fitch explained. Weak revenues pushed up Israel’s central government deficit from 3.3% of GDP in 2011 to 4.2% last year, while the general government deficit reached 5.2%.

Fitch noted that Benjamin Netanyahu's new administration was aiming to reduce the deficit, but faced the same ‘significant’ spending pressures that had derailed his previous coalition government.

‘Fitch assumes sufficient political will is in place to implement fiscal consolidation,’ it said. ‘Containing spending growth and introducing new revenue-raising measures are expected, with the government using non-fiscal measures to deal with the economic concerns that dominated the election.’

The agency warned that a ‘sustained deterioration’ in the debt-to-GDP ratio could lead to a negative action on Israel’s rating. But taking the debt burden closer to the government’s official target of 60% could lead to a positive action.

Israel’s credit rating could also be put at risk from either domestic or regional political instability, it added. It noted that Netanyahu’s new coalition government, which took office in March, brings together parties with diverse objectives and interests and is so far untested.

Israel’s location in a ‘hostile’ region led to further uncertainties. Fitch highlighted the possible negative impact of an Israeli attack on Iran and the retaliation likely to follow. ‘The extent of the action would depend on the economic and physical damage Israel suffered and the situation at the end of hostilities,’ it said. ‘Serious disruption stemming from events in Syria could also be negative for the rating.’

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