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Israel Country Risk Report Q2 2016

Israel Country Risk Report Q2 2016

Core Views Political risks have increased sharply, with more than 100 Israeli and Palestinian deaths recorded between October 2015 and January 2016 and no sign of appeasement in tensions. Prime Minister Benjamin Netanyahu controls a coalition with a majority of just one seat in the Knesset and it is likely that it will not be able to see out its four-year term. Economic growth will accelerate over the coming quarters, as government spending increases and exports and private consumption pick up following one-off slumps.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Gas Framework Approval No Game Changer
The approval by Israeli Prime Minister Benjamin Netanyahu of a natural gas framework will boost FDI in the country over the coming
quarters, but will fail to produce a rapid increase in gas exports, given the many headwinds faced by the developers of the Leviathan
gas field. In addition, Netanyahu's move is likely to create more domestic political instability, given the controversial nature of the gas
framework, without triggering extensive regional cooperation in the Levant.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
No Significant Risk From Loosening Of Fiscal Discipline
Israel's public deficit will increase over 2016 as the government engages in expansionary fiscal policy following a year of capped
expenditure in the absence of a budget. Adopted by the Knesset in November 2015, the 2016 budget marks a definite loosening in fiscal
discipline, but does not alter our positive outlook for the country's sovereign risk profile.
Structural Fiscal Position
TABLE: BREAKDOWN OF PUBLIC REVENUES & EXPENDITURE, % OF TOTAL
External Trade And Investment Outlook
Further Improvements Masking Export Weakness
Israel's current account surplus will increase only moderately over 2016, with additional weakness in global oil prices driving further
external improvements as export growth remains sluggish. As a result, Israel's foreign reserves will continue to increase, reinforcing the
Bank of Israel's capacity to fight off appreciatory pressures on the shekel.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: BREAKDOWN OF IMPORTS IN 2014
TABLE: BREAKDOWN OF EXPORTS IN 2014
Monetary Policy
Moderate Tightening Not Sooner Than Late 2016
The BOI will maintain its accommodative policy over the coming quarters given the risks posed to the shekel, economic activity and
inflation. With the latter reaching the central bank's target of 1-3% annual inflation in late 2016, and with economic growth accelerating
over the coming quarters, the BOI will embark on very moderate monetary tightening from Q416.
Monetary Policy Framework
Chapter 2: 10-Year Forecast
The Israeli Economy To 2025
Encouraging Growth Prospects Over The Coming Decade
Israel's economy will undergo a steady expansion over the coming decade, driven by elevated export and gross fixed capital formation
growth. Political risks will remain significant and the key downside risk to growth.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
No End In Sight For Israeli Isolation
Israel's isolation on the international stage will remain elevated over the coming quarters, as the government's policy towards
Palestinian issues continues to stand at odds with the country's main allies' strategy. This will be reinforced by the limited potential for a
policy shift in Israel, given the strong ideological divide fragmenting the ruling coalition on the Palestinian issue.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Long-Lasting Peace With The Palestinians Unlikely
We do not expect a long-lasting peace agreement between Israel and the Palestinians to be reached over the coming decade. Israel
will also continue to face external security threats from Hizbullah and Iran. That said, it will withstand these challenges due to elevated
levels of internal cohesion and the strength of its security forces.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: MENA – TRADE PROCEDURES AND GOVERNANCE RISK
TABLE: EXPORT AND IMPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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