Israel's credit rating could be raised within two years if its debt burden and budget deficit keep falling, an analyst at Fitch Rating said after the diminishing prospect of war with Iran helped lead to an upgrade in its outlook.
An improvement in public finances and the government's commitment to deficit reduction, as well as a deal between world powers and Iran, led Fitch last week to upgrade its outlook for Israel to "positive" from "stable".
Fitch rates Israel's foreign currency as "A", a notch below Standard & Poor's rating of "A+".
Paul Gamble, the primary analyst for Israel at Fitch, said Fitch now has two years to either raise Israel's rating or move the outlook back to stable.
"One trigger for an upgrade is that you get a consistent narrowing of the deficit," he told Reuters on Thursday. "Public finances are on a positive trend and the deficit is going to come down. Things are on the right track but we're not there yet."
Fitch expects Israel's budget deficit to reach 3.4% of gross domestic product in 2013 – believing one-off effects will bring it in well below the 4.3% government target.
Fitch forecasts for the deficit are 3.2% of GDP in 2014 and 2.8% in 2015 – a bit higher than the Finance Ministry's targets.
Gamble projects Israel's debt to GDP ratio slipping to 65.4% by 2015 from 68.4% in 2012, near the government's medium-term target of 60%.
The government's decision last week to cancel a planned income tax rise in 2014 should not harm government finances as long as budget cuts offset that, he said.
"This measure would be beneficial for economic growth and should strengthen popular support to get the deficit down," Gamble said.
More policy steps would be needed to get the deficit to the target of 2.5% in 2015, Fitch said, echoing recent comments from Israel's central bank.
A deal between world powers and Iran over Iran's nuclear program could be positive for Israel's rating, Fitch said last week as it upgraded its outlook.
Although Israel opposes the deal, fearing it will not stop Iran getting nuclear weapons, Fitch said it "assumes there is no prospect of an Israeli attack on Iranian nuclear facilities over the six months for which the deal runs." Iran says it is not seeking nuclear weapons.
The start to natural gas production in Israel is another positive since it will benefit the economy by reducing fuel imports while solidifying Israel's current account surplus, Fitch said.
S&P in September affirmed Israel's sovereign rating and "stable" outlook, while Moody's Investors Service in August maintained an "A1" rating and "stable" outlook.