Mideast Crisis Not Affecting Israel'sRatings.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 7, 2000

Fitch, the international rating agency, today affirmed its sovereign ratings for the State of Israel, adding that while the current Middle East crisis was a serious step back in the peace process between Israelis and Palestinians

Israel's sovereign Long-term foreign currency rating was affirmed at `A-', and the local currency (shekel) rating was affirmed at `A+'. The Long-term Rating Outlook is Stable.

Barring an improbable escalation of the crisis into a protracted regional war, the key factors supporting Israel's sovereign ratings will not be much affected by the current events. These include, mainly, a dynamic and diversified economy, solid democratic and economic institutions and unwavering support from the U.S. government and the Jewish Diaspora the world over. Essentially, Fitch expects a gradual reduction of Israel's debt burden through a combination of deficit control and strong GDP growth. Under current budget and growth assumptions for 2001, public debt could fall to an estimated 91% of GDP at the end of the coming year. Still, public debt is comparably high and is the main factor constraining the country's ratings. The crisis will not be without cost - mainly in terms of investor confidence and GDP growth, apart from a high cost in lives - but Israel's credit fundamentals will remain solid.

There is a risk, however, that current events will affect macroeconomic balances in the short-term. GDP growth will come off recent peaks, the current and capital accounts will be affected through lower tourism revenues, slower export growth, and perhaps less foreign investment, inflation will creep up marginally and fiscal consolidation could become more difficult.

These risks are partially tied to the resolution of traditional feuds in Israel's internal politics. Prime Minister Barak's call for early elections will only partially resolve the political stalemate, as the polls are likely to return a fragmented parliament again. Critically, the divisions running across Israel's social and political debate are not expected to derail the government's economic policies. Based on this, Fitch expects the 2001 budget to be approved swiftly and a comprehensive tax reform to be introduced in 2001 as proposed.

On the external front, the Palestinian and Israeli premises for a return to negotiations seem difficult to reconcile and the chief negotiating parties appear more distant than ever on the sticking points of a settlement. These continue to be the final status of the city of Jerusalem, claimed as capital by both Israelis and Palestinians, the transfer of land in the West Bank, water rights and the fate of and compensation to Palestinian refugees. In effect, a return to the status quo pre-crisis will require a dose of goodwill that cannot be foreseen in the short term.