Dagong Global Credit Rating Co., Ltd.
June 22, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit ratings of the State of Israel (hereafter referred to as “Israel”) at A-, each with a stable outlook. Racial and religious rift as well as geopolitical risks bring Israel’s repayment environment under pressure, all the while slightly driving up the fiscal deficit and government debt burden. However, the stable growth, relatively low financing costs and sufficient international reserves can assure government solvency.
The key reasons for maintaining the sovereign credit ratings of Israel are below:
First, Israel’s repayment environment is stable and under pressure. Prime Minister Netanyahu is very likely to be reelected in the 2019 general election, thus the continuity of economic and fiscal policies can be guaranteed. However, the governing coalition is relatively loose, which is not favorable to the strengthening of governing efficiency. That, coupled with continuing geopolitical strife, including the Israeli-Palestinian conflict, places pressure upon Israel’s political ecology. The long-term profound financial reform and stringent financial regulation have rendered Israel’s financial system better-equipped to reduce risks. However, falling property prices and fluctuations in the international financial market will pose a threat to the country’s financial stability.
Second, Israel’s economy maintains stable growth, yet growth potential in the medium and long term will be constrained by geopolitical risks as well as racial and sectarian conflicts, among other factors. Strong domestic demand led Israel to register a growth rate of 3.3% in 2017. In the near term, residents’ rising incomes and the government’s tax cuts will support consumption growth, yet geopolitical risks will somewhat impact Israel’s tourism and its overall investment environment. It is expected that in 2018 and 2019, the actual growth rate of Israel could slightly rise to 3.4% and 3.5%, respectively. In the medium and long term, advantages in its hi-tech industry will continue shoring up Israel’s long-term competitiveness. Nonetheless, growth potential will be limited by racial and cultural conflicts, geopolitical rift, inadequate vitality in the private sector, as well as a heavy tax burden, amongst other problems. It is projected that Israel’s economic growth will average around 3.5% over this period.
Third, Israel’s growing fiscal budget causes its fiscal deficit to slightly rise, although repayment sources remain stable. In the near term, as the situation in Iran and Syria deteriorates and Israel deepens its economic reform at home, Israel’s spending on national defense and development will increase, thus fiscal deficit will grow modestly. It is expected that in 2018 and 2019, the Israeli general government’s fiscal deficit will widen to 2.4% and 2.3%, while the financing needs over the same period are 9.8% and 10.1%, respectively. However, the Israeli government’s financing channels are smooth, while its financing costs are relatively low. Besides, considerable assistance from the U.S. and generous donations from overseas Jewish organizations serve to reduce the government fiscal pressure. Hence, government repayment sources remain stable.
Fourth, the country’s strict fiscal discipline and adequate international reserves assure the stability of government solvency. In the near term, slight increases in fiscal budget will drive up government debt. Thus, it is expected that in 2018 and 2019, the Israeli general government debt burden will expand to 59.8% and 59.9%, while the ratio of that debt to fiscal revenues over the same period are 157.4% and 156.9%, respectively. Stable fiscal revenues, a reasonable debt maturity structure, and rigid fiscal discipline all bring about stern government solvency in local currency. Israel’s external debt loads are relatively small, seeing how as of the year-end of 2017, the ratio of total external debt to GDP was 24.8%. Thanks to its relatively strong capacity to earn foreign exchange through exports as well as steady foreign direct investment, Israel’s international reserves cover as much as 126.7% of its total external debt, thus providing stable foreign-currency solvency.
In the short term, geopolitical risks will continue threatening the stability of Israel’s repayment environment while its expansionary fiscal policy slightly drives up fiscal deficit. However, the country’s sound economic base, reasonable debt maturity structure, as well as sufficient international reserves all guarantee stable government solvency. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Israel for the following one to two years.