TEL AVIV/LONDON (Reuters) - Standard & Poor’s raised Israel’s sovereign credit rating one notch to A-plus on Friday, citing improvements in economic policy flexibility and robust growth.
It said the country had weathered the global financial crisis reasonably well, with per capita growth rates averaging 2.4 percent in the past five years. The outlook on the rating is stable.
“The rating action reflects our view of Israel’s improved economic policy flexibility as a result of strong growth and careful macroeconomic management,” S&P said in a statement.
“Israel is on a credible path toward continued government debt burden reduction and stronger external indicators.”
The expected start of natural gas production by the middle of the decade would further enhance the economy’s efficiency, the U.S. credit ratings agency added.
The shekel strengthened to 3.69 per dollar from 3.71 before S&P’s statement. Israel’s stock and bond market is closed on Fridays.
S&P warned that ratings were constrained by significant geo-political risks and a sizeable public sector debt burden.
“While we estimate a mild slowdown from 2.0 percent per capita growth in 2011 to 0.7 percent in 2012, we believe that Israel will recover to 2.0-2.5 percent trend per capita growth in subsequent years,” the agency said.
“This is a high growth rate for an economy with a GDP per capita above $32,000 and reflects rising investment and improving competitiveness.”
Noting the recent change in regime in Egypt and deterioration in ties with Turkey, S&P said any significant armed conflict would have a negative impact on Israel’s ratings if it deters investment and weakens growth potential.
Despite Israel’s strong economy and declining unemployment, the country has seen a wave of social protests over the past two months, demanding the government help lower the cost of living for the middle class. The protests culminated in the largest demonstration in the country’s history last weekend, S&P noted.
“Nevertheless, in our assessment, there will only be limited changes to the current biannual 2011-2012 budget, with the deficit reaching 3 percent (of GDP) in 2011 and declining marginally toward 2 percent,” S&P said.
“This is higher than the targets set by the government, and a reflection of our view that regulatory reforms and expenditure reprioritisation alone will not satisfy public demands. Yet, given Israel’s high growth rates and continued consensus about the need to contain public debt, such a trajectory would nevertheless foresee further debt reduction.”
Bank of Israel Governor Stanley Fischer said he welcomed the ratings upgrade and the government and Finance Ministry’s intention to continue to maintain responsible fiscal policy while preserving the budget’s framework, given the complex global economic reality that is expected to impact Israel’s economy.
“I believe the Israeli economy will continue to justify the confidence shown by a higher rating,” he said in a statement, adding the Bank of Israel would continue to contribute to growth and stability through responsible monetary policy.
Finance Minister Yuval Steinitz said Israel must not become complacent, noting the renewed global crisis requires the government to preserve the budgetary framework and its economic principles.
The upgrade puts S&P’s ratings on par with Moody’s which rates Israel A1 while Fitch has an A rating, one notch lower.
(Editing by Steven Scheer)