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Israel Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

The entry of right-wing party Yisrael Beitenu in the coalition will bring greater stability to the government led by Prime Minister Benjamin Netanyahu, increasing its chances to complete its term. Combined with settlements-related announcements, including building an additional 285 Israeli homes in the West Bank announced in August 2016, it will fuel Palestinian grievances and increases the risks of a renewed intensification of violence in the West Bank and Jerusalem, and of a direct confrontation with Hamas and Gaza. Strong private consumption and a sharp recovery in fixed investment following a two-year slump will underpin growth acceleration over the coming quarters. Nonetheless, the exports sector will recover only gradually from 2017 onwards, being impacted by a strong shekel and a weak macroeconomic outlook in the EU and the US, Israel’s main trade partners.

Table Of Contents

Israel Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Growth Accelerating; Exports Still Lagging.................................................................................................................................8
Israel's economic activity will accelerate over the coming quarters as the recovery in fixed investment since the start of the year
generates further gains and private consumption remains on a positive trajectory. Israeli exports continue to suffer from a strong shekel
and a slowdown in global trade, with only modest improvements ahead from 2017, mostly due to low base effects.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS.................................................................................................................................................................... 10
TABLE: PRIVATE CONSUMPTION FORECASTS.................................................................................................................................................. 10
TABLE: GOVERNMENT CONSUMPTION FORECASTS....................................................................................................................................... 10
TABLE: FIXED INVESTMENT FORECASTS.......................................................................................................................................................... 10
TABLE: NET EXPORTS FORECASTS.................................................................................................................................................................... 11
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Deficit Reduction Constrained By Socio-Economic Realities..................................................................................................11
The draft 2017-2018 budget points to only a gradual reduction of the budget deficit over the next two years as the government seeks to
support leading industries through corporate tax cuts and to reduce socio-economic disparities.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: BREAKDOWN OF PUBLIC REVENUES and EXPENDITURE, % OF TOTAL.............................................................................................. 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS............................................................................................................................................... 13
External Trade And Investment Outlook................................................................................................................ 14
Shrinking C/A Surplus As Imports Pick Up................................................................................................................................14
Israel's current account surplus will head lower over the next two years, following a record high of 4.9% of GDP in 2015. Higher energy
imports amid the recovery in hydrocarbon prices and strong domestic demand will result in robust imports growth. Exporters will
continue to suffer from weak growth in the US and the EU, with trade diversification efforts not showing their effects yet.
Outlook On External Position.................................................................................................................................. 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE......................................................................................................................................... 15
TABLE: BREAKDOWN OF IMPORTS IN 2014....................................................................................................................................................... 15
TABLE: BREAKDOWN OF EXPORTS IN 2014....................................................................................................................................................... 16
TABLE: CURRENT ACCOUNT BALANCE FORECASTS....................................................................................................................................... 16
Currency Forecast.................................................................................................................................................... 17
ILS: Appreciatory Pressures Intensifying...................................................................................................................................17
The gradual uptick in foreign investment stemming from the approval of the modified gas framework, and delayed interest rates hikes
in the US, will increase appreciatory pressures on the shekel. The BOI will continue to mitigate these pressures through significant
interventions on the FX market. We forecast the shekel to trade at ILS3.8200/USD at the end of 2016, broadly in line with current levels.
TABLE: BMI CURRENCY FORECAST.................................................................................................................................................................... 18
Chapter 2: 10-Year Forecast................................................................................................................... 19
The Israeli Economy To 2025.................................................................................................................................. 19
Robust Growth Prospects As Investment Picks Up..................................................................................................................19
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..................................................................................................................................... 19
Chapter 3: Political Outlook................................................................................................................... 23
SWOT Analysis......................................................................................................................................................... 23
BMI Political Risk Index........................................................................................................................................... 23
Domestic Politics..................................................................................................................................................... 24
Settlements Drive Raising International Tensions.....................................................................................................................24
The rightward shift of the Israeli government and strong population growth in West Bank settlements suggest that a settlements freeze
is off the cards. Combined with the intensification of home demolitions, it will fuel Palestinian grievances and further undermine the
chances of a peace agreement. The settlements drive will also result in greater Israeli isolation on the international stage.
TABLE: POLITICAL OVERVIEW............................................................................................................................................................................. 24
Long-Term Political Outlook................................................................................................................................... 26
Long-Lasting Peace With The Palestinians Unlikely.................................................................................................................26
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................................................................................................................... 29
SWOT Analysis......................................................................................................................................................... 29
Operational Risk Index............................................................................................................................................ 29
Operational Risk....................................................................................................................................................... 30
TABLE: OPERATIONAL RISK................................................................................................................................................................................. 30
Market Size And Utilities.......................................................................................................................................... 31
TABLE: MARKET SIZE AND UTILITIES RISK........................................................................................................................................................ 31
Labour Costs............................................................................................................................................................ 34
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE............................................................................................... 35
Chapter 5: BMI Global Macro Outlook................................................................................................... 39
Global Macro Outlook.............................................................................................................................................. 39
EMs Past The Worst, But Structural Problems Persist.............................................................................................................39
TABLE: GLOBAL ASSUMPTIONS.......................................................................................................................................................................... 39
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %.................................................................................................................................. 40
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %................................................................................................................................. 41
TABLE: MACROECONOMIC DATA and FORECASTS.............................................................................................................................................. 43

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