International ratings agency Standard & Poor's on 19 February warned Israel that it faces a downgrade within weeks unless cuts are made to the budget. Its rating outlook is already negative. '2003 started off very badly for Israel due to its NIS 2,700 million ($554 million) January budget deficit, and we expect further fiscal deterioration,' said head of S&P's sovereign rating division, David Reuss. 'Clearly the Israeli economy is in recession and there is great uncertainty surrounding the Iraq situation, so it would be naïve to think that the situation will improve in a matter of weeks,' he warned, concluding that this made a reduction in expenditure necessary. Reuss also warned that S&P would not look favourably on any compromise of the Bank of Israel's (central bank) independence: he was referring to reports that Prime Minister Ariel Sharon was considering firing the bank's head, David Klein, over the latter's remarks on the stability of the Israeli banking system. In October, S&P downgraded Israel's long-term local currency rating to A+ from AA- and short-term local currency rating to A1 from A1+, while affirming foreign currency ratings at A-/A1.
The Israeli economy contracted by 1.1 per cent in 2002, according to official figures, and the statistics bureau forecasts a further contraction of 0.5 per cent in 2003. In 2000, the economy grew 6 per cent, before being hit by the Palestinian intifada and the collapse of technology shares. Israel is currently seeking an aid package worth billions of dollars from the US to help ease its economic woes.