The Israeli Ministry of Finance can feel pleased with itself. Less than six months ago, after a period of political instability, the country’s coffers were plagued by a hole as large as US$4 billion. Last week, Minister Yair Lapid was able to cancel further tax rises, as expenses have been curtailed and revenues have been higher than predicted.

Enter Fitch Ratings, which announced late last week that it was upgrading Israel’s credit outlook to positive. “The foreign and local currency Issuer Default Ratings (IDR) at ‘A’ and ‘A+’ respectively. The issue ratings on Israel’s senior unsecured foreign and local currency bonds have also been affirmed at ‘A’ and ‘A+’ respectively.”

There are several key factors causing this optimism:

• The budget deficit in 2013 is expected to be 3.4% of GDP, less than 3.9% of 2012 and far less than the 4.6% originally forecast.
• The first flows of off-shore gas production has led to a reduction in the trade deficit.
• FDI remains solid.
• The Iranian threat, at least for the moment, is on hold.

Fitch was not concerned by the scrapping of tax increases. “It said this does not change its view on the government’s commitment to reduce the deficit in the future. The agency (also) noted the government’s progress in addressing the economy’s structural problems, citing cuts in National Insurance allotments that could encourage people to enter the workforce.”

Two days earlier, S&P hade made similar encouraging noises on the Israeli economy. While sounding more cautious about the government debt and the Iranian factor, the agency believes that there is no property ‘bubble’ as predicted by many and that gas reserves will eventually make a significant difference to the economy.

So after all the back slapping, what does this mean for the Israeli financial planners? Very simple. The government in Jerusalem can now devote less money to interest repayments and redirect resources to infrastructure projects. That should help direct the country to further growth.