S&P Affrms Israel's A- FC And AA- LCRtgs,Otlk Stble.

LONDON--(BUSINESS WIRE)--S&P's CreditWire 11/04/98--Standard & Poor's today affirmed its single-'A'-minus long-term foreign currency and double-'A'-minus long-term local currency issuer credit ratings on the State of Israel. Standard & Poor's also affirmed its 'A-1' short-term foreign currency and

broad and high-tech oriented export base. -- Substantial progress in structural reforms, particularly bank

privatization and capital account liberalization. Notwithstanding

the cyclical slowdown since 1997, with real GDP growth of no more

than 1.5% and 2%, in 1998 and 1999, respectively, recent and

prospective structural reforms are likely to keep Israel's

medium-term growth potential at about 4%--a level well above

other sovereigns at similar stages of development. -- The government's strengthened commitment to fiscal consolidation

and price stability. Tight monetary policy, which resulted in a

marked reduction in inflation during 1998, is expected to hold

consumer price increases between 4% and 5% annually in the medium

term. In line with the government's medium-term fiscal plan,

which aims for a deficit of 1.5% of GDP in 2001, the budget

deficit on an inflation-adjusted basis is set to decline to 2.4%

of GDP this year and to 2% next year. -- A robust international liquidity position and declining public

sector external indebtedness. Strong capital inflows in recent

years took Israel's reserves-to-imports ratio to about six

months. Net external public debt is expected to fall to about 15%

of exports this year (from 45% in 1995), and benefits from low

interest costs and a favorable maturity structure. The ratings

are constrained by: -- The vulnerability of Israel's economy to shocks stemming from the

country's complex security situation. Advancements in the peace

process, which remain susceptible to setbacks, are critical for

long-term economic prosperity in Israel and the region. In

addition, deep seated inflation expectations are likely to

require a prolonged period of tight monetary policy, which in

turn will make it difficult for the country to benefit fully from

its strong growth potential in the near term. -- A heavy--although slowly diminishing--government debt burden.

Public-debt-to-GDP continues to be close to 110% in 1998,

highlighting the importance for Israel's credit standing of

adhering to the fiscal deficit reduction program. However,

Israel's public debt is denominated predominantly in long-term

local currency instruments held by domestic investors.

OUTLOOK: STABLE

The outlook assumes continued adherence to disciplined fiscal and monetary policies, despite growing political pressure in the face of slow economic growth and the rise in the unemployment rate to over 9%. The slow pace of deficit reduction envisaged in the government's medium-term deficit reduction program, and possible slippages along the way, imply only a gradual reduction in the government's debt burden. External imbalances, however, should improve against the backdrop of weak domestic demand. The current account deficit should remain below 2.5% of GDP this year and in 1999, financed increasingly by foreign direct investment inflows. The outlook also is supported by Israel's relatively secure geopolitical position, where external security risks are largely offset by strong diplomatic and financial support from the U.S., Standard & Poor's said.---CreditWire