Ongoing corruption allegations facing Prime Minister BinyaminNetanyahu (across different cases) pose limited risks to the stabilityof the ruling coalition in the short term. However, it will push thegovernment to continue adopting assertive policies, notably towardsthe Palestinians, increasing security risks.
Economic growth will slow to 3.5% in 2017, following a very strong2016 when real GDP growth came in at 4.0%. Nonetheless, this doesnot affect our view that the Israeli economy continues to boast strongfundamentals and will outperform other developed economies overthe coming years. Strong labour market dynamics will drive privateconsumption growth, while fixed capital formation will benefit fromtax cuts and sustained investment in the gas sector.
The Israeli government will undertake modest fiscal expansion underthe 2017-2018 budget, resulting in an increase in the budget deficit.Nonetheless, this poses virtually no risk to Israel's sovereign profile,as the debt stock remains moderate by developed market standardsand as foreign reserves continue to rise.
Pressures on the shekel will continue to lie towards appreciation,amidstrong investment in Israel's natural gas sector, low inflation andpolicy uncertainty in the US, resulting in dollar weakness. Sustainedinterventions by the Bank of Israel (BOI) on the foreign exchangemarkets will continue to mitigate these pressures. We are broadlyneutral towards the shekel over the coming months.
Major Forecast Changes
We have revised our forecasts for Israel's current account balance to3.4% of GDP in 2017 and 3.8% of GDP, from 2.6% and 2.5%.We now forecast that the BOI will maintain its unchanged policy ratethroughout 2017 (at 0.10%). The BOI will hike rates by only 15 basispoints in 2018 to 0.25%, whereas we had previously forecasted acumulative hike of 40 basis points to 0.5%.
We now forecast the shekel to average ILS3.6200/USD throughout2017, compared with our previous forecast of ILS3.64000/USD.