S&P: Israel now a ‘high-income’ country

Strong growth, low inflation, and a stable security situation are all good signs for the Israeli economy, the ratings agency says

Tel Aviv beach skyline as seen from Jaffa. (Photo credit: Gili Yaari / Flash90)
Tel Aviv beach skyline as seen from Jaffa. (Photo credit: Gili Yaari / Flash90)

Israel’s economy is doing well enough that the country can now be considered “high-income,” according to ratings company Standard and Poor’s (S&P) in its latest evaluation of the country’s fiscal state.

In its ratings statement, S&P said that with a per capita annual income of over $38,000, “we now view Israel as a high-income economy, with trend growth at the higher end of its peer income group.”

Even better news for Israelis: S&P expects that per capita income figure to grow to almost $42,000 by 2017. Just five years ago, per capita income was about $28,000.

This is due, S&P said, to Israel’s “prosperous and diverse economy,” with a good mix of manufacturing and high-tech, and also to the benefits the economy will realize as the country’s natural gas production comes online. In its statement, S&P affirmed its long- and short-term foreign and local currency sovereign credit ratings for Israel at A+/A-1.

Israel’s economy is stable, and its prospects for growth are good, the agency said. GDP is expected to grow 3.2% in real terms in 2014, and a similar rate of growth is expected over the next three years as well.

Aiding that growth is the extra effort the government is putting in to reduce debt as a percentage of GDP. Currently that figure is at 67%, which is considered reasonable by international standards, and it is expected to drop to 61% by 2017, especially if interest rates don’t go up too much. Inflation is expected to remain low, as well, with annual rates of between 1.4% and 2.5% predicted through 2017.

Two factors have been holding Israel back. Geopolitical risks, of course, are always a factor, but unless things significantly deteriorate, the security issues are not expected to have a major impact the economy. If anything, the agency said, “recent [geopolitical] trends have been favorable to Israel.” Nonetheless, S&P said, “We could consider raising our ratings on Israel if it makes material progress in defusing external security risks. In our view, such progress would have positive implications for domestic stability, economic growth, and investor confidence.”

The second major issue for the economy is the shekel’s strength, which is hampering domestic growth. The Bank of Israel has done a yeoman’s job in keeping the shekel’s value stable versus the dollar and euro, but S&P believes that effort is running out of gas. “We no longer view the shekel as a free-floating currency and we expect the Bank of Israel to become increasingly interventionist,” the statement said.

This is going to be necessary because it has become clear that the BOI’s policy until now “has failed to stem rapid price appreciation in the housing sector, but they do appear to have contained systemic risks.”

Overall, though, things are definitely looking up for the Israeli economy, according to S&P. “The stable outlook reflects our opinion that consensus within the Israeli government to consolidate the public finances will continue to anchor fiscal planning and reduce government debt,” said the agency. “We also expect the impact of security risks on the Israeli economy to remain contained.”

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