Israel's political instability and corruption stand out as important weaknesses relative to rating peers in the A rating range and could "eventually jeopardize" the country's high institutional strength assessment, the Moody's rating agency states in its annual credit report on the Jewish state released Monday.
Moody's Investors Service says that Israel's A1 government bond rating and stable outlook are underpinned by the country's high economic, institutional and government financial strength, but the rating is constrained by significant social and political challenges, which lead to moderate susceptibility to event risk.
Moody's ratings affect investors' decisions to invest in different countries and financial bodies' decisions to issue loans according to the countries' ranking.
Alongside the compliments, the company warns that Israel's high rating is constrained by significant social and political challenges, which lead to moderate susceptibility to event risk.
Moody's criticizes Israel's volatile domestic politics and the recurring upheavals which have delayed fiscal corrections that would have kept the budget deficit on target the last two years.
The report suggests that the government's commitment to fiscal discipline is waning as growth has slowed, and expresses its hope that the deficit will be narrowed this year and next year.
At the same time, the report praises Israel's high economic strength, which is supported by its relatively high GDP per capita and its economic resilience, which has been illustrated in recent years during frequent economic and political shocks.
However, the report notes, this resilience is being challenged once again by the ongoing euro zone debt crisis and the concurrent slowdown in the global economy.
Fiscal strategy substantially eased
The rating agency says that government has eased its fiscal strategy substantially for the coming years, after having missed its deficit targets in both 2011 and 2012 by widening margins.
The rating agency lauds the NIS 14 billion (about $3.5 billion) tax package approved by the government in August.
According to the company, the sustainability of the public finances will also depend upon how well the government manages the revenue from natural gas sales, in particular whether it is able to restrict the share of gas revenues used to finance current spending in order to build up a sovereign wealth fund.
According to the report, the violent uprising in Syria and concerns about Iran's nuclear program have led the Israeli government to maintain a high level of defense spending, representing about 15% of total government expenditure.
However, the negative impact of the cutoff of Egyptian gas supplies on the Israeli balance of payments will be more than offset as Israel's own gas production increases substantially between 2013 and 2016.
Moody's judges Israel's susceptibility to event risk as moderate based on the political risks facing the country, both domestic and external. But according to the agency, the Arab Spring revolutions have ironically created problems for Israel, for whom the 1979 peace treaty with Egypt has been critical to its security framework.
Finance Ministry and Bank of Israel officials expressed their satisfaction over the report, noting that Israel remained one of the only countries whose credit rating had not been downgraded in the past two years.