S& Revises Outlook on Israel to Positive FromStable.

Business Editors

LONDON--(BUSINESS WIRE)--Standard &Poor's

Feb. 17, 2000-- Standard &Poor's today revised the outlook on the State of Israel to positive from stable in recognition of the substantial changes of recent years in the structure of Israel's economy, the significant

At the same time Standard &Poor's affirmed its single-'A'-minus/'A-1' foreign currency and double-'A'-minus/'A-1'-plus local currency issuer credit ratings on the sovereign.

Also affirmed are Israel's single-'A'-minus foreign currency and double-'A'-minus local currency senior unsecured debt ratings.

Structural changes and reforms -- including bank privatization, capital account liberalization, and deregulation of the business environment -- have resulted in high long-term growth potential. Unlike the first half of the 1990s, Israel's current account deficit today is relatively modest and almost entirely financed by foreign direct investment inflows. Inflation was reduced to 1.3% by December 1999, from more than 10% in December 1996; and the exchange rate is effectively floating freely.

An upgrade for Israel's ratings in the medium term hinges on further fiscal consolidation and continued implementation of structural reforms, while progress in disinflation is sustained. Additional impetus for an upgrade would be an acceleration of fiscal consolidation beyond that which is likely given the government's current deficit reduction plans, and increased privatization in banking, telecommunications, and the electricity sector.

On the other hand, downward pressure on the rating could re-emerge if fiscal policy is loosened as a result of calls to widen the budget deficit again, or if monetary policy fails to maintain price stability.

Although a comprehensive peace deal is important for Israel's long-term prospects, renewed advancement in the peace process alone is unlikely to be a precursor for a future upgrade. Already figured into the ratings on Israel is its secure geopolitical and military position since the end of the Cold War--bolstered by strong diplomatic and financial support from the U.S.

Israel's ratings are supported by:

--   Its diversified and well-developed economy, which is increasingly
     high-tech and export-oriented. Real GDP growth is poised to pick
     up to 3.5% this year, while the structural changes of recent
     years leave Israel's economy well positioned to realize its
     long-term growth potential of 4%-5%.

--   A robust international liquidity position and manageable external
     debt burden. Strong capital inflows in recent years have taken
     the reserve coverage ratio of Israel's external financing gap to
     a comfortable 100%. Although, net ratios of external debt and net
     public external debt to exports have declined to 25% and 12%,
     respectively, they are still above the median for single-'A'
     category sovereigns. However, Israel's public external debt
     benefits from low interest costs and a favorable maturity
     structure.

--   The government's commitment to orthodox economic policies,
     including fiscal consolidation, price stability, and structural
     reforms. Following some revenue slippage last year, the
     government of Prime Minister Ehud Barak has revised the target
     for the inflation-adjusted central government budget deficit to
     2.5% of GDP for 2000 from an initial 1.75%. The goal of
     eventually lowering this to 1.5% has been delayed until 2003. In
     the important area of monetary policy, the appointment of David
     Klein as governor of the Bank of Israel provides policy
     continuity.

       Israel's ratings are constrained by:

--   A still heavy public debt burden and the for further substantial
     progress in fiscal consolidation. The public debt burden remains
     at about 100% of GDP this year and is one of the highest among
     similarly rated sovereigns. However, this debt burden is
     alleviated somewhat by its favorable structure -- being
     denominated predominantly in long-term local currency
     instruments, and held by domestic investors. On the other hand,
     the slow pace of deficit reduction and possible slippages mean
     that the debt burden will only gradually trend down, unless
     fiscal consolidation and privatization are accelerated.

--   The vulnerability of Israel's economy to shocks stemming from the
     country's complex security situation.

Significant setbacks to the peace process would have a major impact on Israel's economy, notably tourism and foreign direct investment, Standard &Poor's said. ---CreditWire