In its annual report on Israel, Moody's Investors Service says the country's A2 ratings and stable outlook for foreign-currency debt, bank deposits, and for domestic bonds are based on robust market institutions, a proactive economic policy, and a highly educated and skilled work force.
Other rating strengths include a strong civil society, active financial support from the Jewish Diaspora, and financial and military support from the United States.
Credit concerns include an economic dependence on exports from the highly volatile technology sector, a fragmented political system leading to unwieldy coalition governments, challenges from the Palestinian Authority and Israel's neighbors, and reducing large, burdensome domestic debt, while containing the country's budget deficit.
"The remarkable turnaround of the Israeli economy from the mid-1980s through 2000 has slowed substantially with Israel now in its deepest recession in history," says Moody's sovereign analyst, Jonathan Schiffer. The earlier change has taken Israel from a low-growth, high-inflation environment with substantial regulatory and bureaucratic intervention, to a more market-oriented economy with tight fiscal and monetary policies.
Although cyclical in nature, the effects of the global economic slowdown and, particularly, the 2000 NASDAQ stock market crash harmed investment in Israeli start-up companies and exports of goods and services from the high-technology sector, says the Moody's report.
"And terrorist actions associated with the Palestinian 'intifada' have undermined consumer confidence, investment, and tourism," says Schiffer. "The ensuing recession plus increased security expenses raised government expenditures while revenues were lowered due to a sharp drop in wages, consumption, and prices."
The ensuing budget deficits inevitably increased public-sector debt. Nevertheless, 2003 saw a stabilization of the economy, and structural reforms that, if successfully implemented, says Moody's, will lower the fiscal deficit in 2004 and thereafter.
"Cuts in public-sector wages and employment and social welfare entitlements, along with accelerated income tax reductions, rationalization of government administrative units, privatization of various firms, and introduction of competition into natural monopoly sectors, are all elements of radical reform instituted by the Ministry of Finance," says Schiffer.
Along with pension reform, these actions aim to curtail the country's generous welfare state and its large public sector. Moody's A2 ratings for Israel do not include debt instruments guaranteed by non-Israeli entities such as Israeli government bonds denominated in US dollars and guaranteed by the US Government, which carry the Aaa rating of the guarantor. — (menareport.com)
© 2004 Mena Report (www.menareport.com)
