Israel Country Risk Report Q4 2017
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.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks
- Chapter 1: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Growth Outlook
- Growth To Slow Down Modestly In Coming Quarters
- The Israeli economy will experience a modest slowdown in growth over the second half of 2017, owing to base effects and a moderating
- fixed capital formation expansion. That said, strong labour market dynamics, and government policies encouraging investment, underpin
- our favourable long-term outlook for the country.
- 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
- Limited Risk To Sovereign Profile From Modest Fiscal Expansion
- A shift towards moderate fiscal expansion in Israel will result in widening budget deficits over the next two years as the government
- increases social spending and tax cuts. This does not pose risks to Israel's strengthening sovereign profile, as underpinned by rising
- reserves and declining debt levels.
- Structural Fiscal Position
- TABLE: BREAKDOWN OF PUBLIC REVENUES AND EXPENDITURE, % OF TOTAL
- TABLE: FISCAL AND PUBLIC DEBT FORECASTS
- External Trade And Investment Outlook
- C/A Surplus To Bottom In 2017
- Israel's current account surplus will shrink in 2017 as rising imports, driven by higher fuel costs, offset the recovery of Israeli exporters.
- From 2018 onwards, however, the current account will return to growth as exports strengthen on the back of natural gas sector
- development and trade diversification.
- Outlook On External Position
- TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
- TABLE: BREAKDOWN OF IMPORTS IN 2016
- TABLE: BREAKDOWN OF EXPORTS IN 2016
- TABLE: CURRENT ACCOUNT BALANCE FORECASTS
- Currency Forecast
- ILS: Stability Amid BOI Interventions
- Pressures on the Israeli shekel will remain predominantly appreciatory over the coming quarters amid strong investment in Israel's
- natural gas sector, low inflation and robust GDP growth. However, interventions on the foreign exchange market, combined with a
- widening interest rate differential with the US, will enable the Bank of Israel to contain these appreciatory pressures. We are neutral
- towards the shekel over the remainder of 2017.
- TABLE: BMI CURRENCY FORECAST
- Chapter 2: 10-Year Forecast
- The Israeli Economy To 2026
- Robust Growth Prospects As Investment Picks Up
- Israel's economy will undergo a steady expansion over the coming decade, driven by elevated private consumption and gross fixed
- capital formation growth. Improving productivity – by encouraging participation of Arab-Israeli and Ultra-Orthodox communities in the
- labour force, and reducing market inefficiencies – will be key drivers of long-term growth. Political risks will remain significant and pose
- the most prominent downside to growth.
- TABLE: LONG-TERM MACROECONOMIC FORECASTS
- Chapter 3: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Domestic Politics
- Netanyahu To Remain In Power For Now, Despite Corruption Allegations
- Corruption allegations facing Prime Minister Binyamin Netanyahu do not pose a direct threat to the Israeli government's stability, with
- Netanyahu affirming that he will not resign, and the coalition reiterating its support. Meanwhile, the prime minister will likely continue
- adopting assertive policies towards the Palestinians to appease coalition partners – which, in turn, will raise risks of Palestinian
- TABLE: POLITICAL OVERVIEW
- Long-Term Political Outlook
- Rising Internal Polarisation; External Security Risks Here To Stay
- Political risk will increase over the coming decade as demographic shifts, notably rising Arab and ultra-orthodox communities, result in a
- weakening of Israel's internal cohesion. Meanwhile, external threats will persist, with a peace settlement with the Palestinians unlikely to
- be reached over the coming decade, amid risks stemming from an emboldened Hizbullah.
- Chapter 4: Operational Risk
- Operational Risk
- TABLE: OPERATIONAL RISK
- Labour Costs
- TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE
- Legal Environment
- TABLE: BUREAUCRATIC PROCEDURES
- Chapter 5: BMI Global Macro Outlook
- As Good As It Gets?
- TABLE: GLOBAL MACROECONOMIC FORECASTS
- TABLE: DEVELOPED STATES – REAL GDP GROWTH, % y-o-y
- TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
- TABLE: ISRAEL – MACROECONOMIC DATA AND FORECASTS