Jerusalem, 23 September 1999
Investment Banks Evaluate Israel's Credit Rating
(Communicated by the Finance Ministry Spokesman)
Morgan Stanley Dean Witter and Salomon Smith Barney reports on Israel
issued this month - in the wake of the May election, recent Government
decisions on the State budget and structural reform, and the Sharm
a-Sheikh accord - both conclude that Israel is deserving of a credit
rating on par with the world's most stable economies.
The Salomon Smith Barney report - which equates Israel's developed
industrial economy with those of similar, AA-rated western European
nations - offers praise for the commitment of Israel's political,
economic and academic leadership to prudent macro-economic policy and
structural reform, as well as for the quality of education and the labor
force in Israel.
At the same time, the report continues, the limitations imposed on
Israel's credit rating derive from the geopolitical situation in the
Middle East, and from the need for continued fiscal restraint and
deficit reduction. According to Salomon Smith Barney, Prime Minister
Barak's commitment to a new era in the peace process is promising, and
substantive progress toward peace will likely improve Israel's
international credit rating in the future.
The report determines that, for the third consecutive year now, Israel
has not realized its estimated growth potential of 4-5%, anticipating
growth for 1999 at between 2-2.5%. This slowdown is attributed to a
decline in the rate of immigration, the global economic recession and
financial crises; the stalemate in the peace process, and tight fiscal
and monetary policies. The report adds, however, that the external
trends which have adversely affected the Israeli economy are now being
reversed, which should exert a positive influence on the economic growth
rate. In this vein, Salomon Smith Barney cites the recovery in Asia and
Europe, as well as the fact that global financial markets are now more
robust and healthy than last year.
The report expects that Israel's balance of payments deficit will be
relatively small in 1999, at about 1% of GDP. In addition, industrial
exports have performed well, and declared foreign investments during the
first half of 1999 totaled $1.7 billion. Combined with an increase in
Israel's foreign currency reserves, these factors have contributed to
Israel's strong external liquidity position.
The Salomon Smith Barney analysts believe that Government decisions
concerning the deficit and inflation targets for 2000 will prove
"comfortable" for international credit rating agencies, and that - if
Israel's economic parameters approach the standards of its main western
European and American trading partners - its international credit rating
may be upgraded in within the next two years.
The Morgan Stanley Dean Witter report views Israel's economy worthy of a
higher credit rating than currently assigned by rating agencies. The
investment bank emphasizes Israel's commitment to reducing government
intervention in the economy and to stable macro-economic policy.
Furthermore, according to the report, substantive progress in the peace
process will be "beneficial' to Israel's international credit rating.
The report suggests that Israel's relations with the United States and
with Diaspora communities offers "additional comfort" and forecasts a
2.3% growth rate for 1999, an inflation rate under 4% and a budget
deficit of approximately 1% of GDP. Accordingly, the report predicts
that the Government of Israel should experience no difficulty in
financing the deficit. In the intermediate term, Morgan Stanley Dean
Witter believes that a 4-5% rate of growth for the Israeli economy is a
realistic target.