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Israel Country Risk Report Q4 2017

Israel Country Risk Report Q4 2017

Core Views

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
Contents
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
unrest.
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

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