Money (illustrative)
Money (illustrative)Flash 90

Fitch has downgraded the outlook for Israel's sovereign long-term foreign currency issuer default rating from Positive to Stable, but the Finance Ministry isn’t concerned, according to the Globes financial newspaper.

In its announcement of the change, which came on Friday, Fitch said the change in outlook was because of the expected wider fiscal deficit in 2014 and 2105 as a result of Operation Protective Edge in Gaza in the summer.

"Fiscal consolidation has been set back by military operations against Hamas in Gaza in the third quarter," Fitch's announcement said, adding, "Fitch forecasts a central government deficit of 3.3% of GDP this year, compared with a budgeted target of 2.8% of GDP. Additional military spending is contributing to a widening of the budgeted deficit to 3.4% of GDP in 2015. This will also mean the fiscal expenditure rule is likely to be breached. A tighter budget is planned for 2016, which in Fitch's opinion will be tough without new revenue-raising measures.”

"Government debt is fairly high, at a Fitch-forecast 67.4% of GDP at end-2014. Progress in lowering debt toward the peer median of 48.9% has been disrupted by the Gaza conflict. Financing flexibility is high, with deep and liquid local markets, access to international capital markets, an active diaspora bond program, and U.S. government guarantees in the event of market disruption. The structure of debt is favorable," the announcement said.

Israel's Ministry of Finance said in response that it sees the downgrade as predictable, and as objectively reflecting the state of the Israeli economy.

According to Globes, the Ministry of Finance said it recognizes that it was unrealistic to expect an upgrade for Israel at present given the current political instability and the budget proposal for 2015 that raises the fiscal deficit target and halts the process of reducing Israel's debt to GDP ratio.

Opposition politicians, meanwhile, were quick to use Fitch's move to attack the government, and particularly Prime Minister Binyamin Netanyahu and Finance Minister Yair Lapid.

Opposition leader and Labor party chairman MK Yitzhak Herzog said, "The world understands what Israel's people experience every day that the economy under Netanyahu and Lapid's leadership is stuck. The fairy tales told by the prime minister and minister of finance about a growing economy are a bluff that has been exposed to all. The budget that the two have presented will lead to further deterioration and will hit the pockets of every citizen."

Meretz chairwoman MK Zehava Galon said, "The rating outlook downgrade is a result of failed economic policy that is all media spin. Just last week, when Lapid came to the Knesset to present the budget, he dismissed questions from members of Knesset about the negative growth in the last quarter and said, 'the fact is that that the rating agencies are not concerned.'"

Labor MK Erel Margalit said that the downgrade was a slap in the face for Netanyahu, who had lost control of the Israeli economy and left it in the hands of an economic tyro.