Israel's sovereign credit rating is safe for the time being, estimates the Finance Ministry's accountant general, Nir Gilad.

His assessment is based on recent conversations with analysts covering Israel at leading international credit agencies Standard and Poor's, Fitch, and Moody's.

The two key concerns in the agencies' review of Israel's economic status are the deficit and the budget. Barring drastic changes in the state's revenues from tax, this year's deficit should be 3.9%, as planned, Gilad said.

He said the main test for the sovereign credit rating will be in October or November when the Knesset has to approve the 2003 state budget.

The treasury has been hinting that a failure to ratify the budget could lead to a credit rating downgrade, and has been using this threat to pressure the coalition parties to vote in favor.

That view was bolstered yesterday by HSBC, which said that Israel's debt to GDP ratio is cause for concern but that the country's creditworthiness is not in doubt, barring the parliament's failure to pass the budget.

The state of Israel is rated far lower than it should be because it is located in the Middle East," Gilad said. He said the geopolitical situation has deteriorated but there is no sign of a fully-fledged regional flare-up - in other words he believes Israel's credit rating already incorporates the regional environment and now the only factors affecting it are fiscal.

He said last week's credit downgrading of Israel's major banks, Bank Hapoalim and Bank Leumi, indicated nothing about the future of state's rating.

Unlike the banking sector, Gilad says the government has implemented a restrictive policy for three years in necessary budget amendments and the handling of transfer payments.

The treasury also says all parameters indicating Israel's ability to meet foreign commitments - the factors relevant to sovereign credit ratings - have remained strong. These are debt repayment capability, foreign currency reserves, balance of payments, and liquidity. At the end of this week, treasury officials will meet with S&P and Moody's analysts at an International Monetary Fund conference.

Gilad had trouble explaining the sharp drops on Tel Aviv's bond market after the banks' credit downgrade. He said the banks' fund-raising costs abroad already incorporated the lower rating. He said the state continues to raise funds abroad according to a regular and orderly plan.

Gilad said the state recently canceled planned offerings due to "poor" price offers. Recently offers have improved - US interest rates dropped - but there are concerns Israel will have to pay a higher margin above those low rates.

The treasury believes that absolute prices are currently relatively low, but raising funds at high margins sends a bad sign to the market. The treasury is therefore continuing to watch market situations.

Nonetheless, there is an open offering and investment banks Salomon Smith Barney and Lehman Brothers are constantly monitoring the market for Israel. If the situation improves, the funds will be raised.