Coface Group
Israel

Israel

Population 8.044 million
GDP 304.983 US$ billion
A3
Country risk assessment
A2
Business Climate
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Synthesis

major macro economic indicators

  2012 2013  2014 (e) 2015 (p)
GDP growth (%) 3.4 3.5 3.3 2.5
Inflation (yearly average) (%) 1.7 1.8  0.0 1.0
Budget balance (% GDP)  -5.1  -4.2  -3.9 -3.6
Current account balance (% GDP)  0.2  2.5  2.1 1.8
Public debt (% GDP)  67.6  66.8 66.3 66.0

 

 (f) Forecast

STRENGTHS

  • Industry dominated by high-tech products
  • Highly skilled workforce
  • Political and financial support from the US and the diaspora
  • Natural gas production since mid-2013 from large offshore reserves

WEAKNESSES

  • Political fragmentation and weak coalition governments
  • Stalemate in Israeli-Palestinian Negotiations Persists
  • Relatively high public debt 

Risk assessment

Rising tide of tensions with Palestinian territories

Since October 2014, East Jerusalem has been the scene of almost-daily violence between the Jewish and Muslim communities. The tensions are chiefly concentrated around the sharing of the Esplanade of the Mosques, a holy site of both Islam and Judaism. In this context, government coalition formed by Benyamin Netanyahu in March 2013, bringing together the centrist parties (Yesh Atid) and the ultranationalists (Bayit Yehudi) was truly compromised. Prime minister political line was fiercely criticised by the opposition and government members. The main dissension topics were the law act which proclaimed Israeli state as the Jewish state, worsening image of Israel abroad and economics and social policies maintain Benyamin Netanyahu. Political crisis constrained Israeli Prime minister to dissolve the Knesset and to fix new early election during March 2015.

 

Continued weak growth

In 2014, Israel's economy underwent a marked slowdown, losing more than one percentage point of growth following the conflict which took place between the Israeli army and the armed factions of Hamas, which governs the Gaza strip. A weak increase in business activity has been observed and activity even contracted during Q3, due to a decline in domestic demand and a fall in exports.

In 2015, growth will remain weak and will stagnate around 2.5%. This is because renewed tensions between Jerusalem's Jewish and Muslim communities, in a context already marked by an economic downturn, will make it difficult to envisage an immediate recovery of economic activity. Telecommunications and transport will be less affected by the risk of conflict and could benefit from a more rapid recovery. Maritime transport in particular will be sustained by construction of the private port of Haifa. As for the tourism sector, this will be more lastingly affected by the security situation.

Inflation was close to zero in 2014 and will remain weak in 2015. This level of inflation results both from a worldwide drop in raw materials prices and an active government policy aimed at cutting the cost of living.

 

Fiscal austerity and maintenance of the external financial situation

The recent conflict with the Gaza strip seems to have slowed the process of budgetary rebalancing begun in 2010. The direct (growth in military spending) and indirect (contraction in activity in Q3 2014) financial repercussions linked to the conflict led to a higher than expected public deficit in 2014. The government will continue, during budget year 2015, to reduce its spending and introduce budget cuts. However these measures are overshadowed by the rise in the military budget and the tax relief accorded to first-time buyers.

After falling for several years in a row, the public debt stabilised in 2014 and is unlikely to change much in 2015.

Following a decline in exports, the trade deficit widened in 2014. It was partly offset by the surplus on the balance of services enabling a surplus to be maintained on the current account balance.

 

Strong banking system and healthy financial position of businesses

Highly concentrated and focused on the domestic market, the banking sector is strong. It remains well capitalised and the effect of non-performing loans is limited. On top of this, it has shown strong resilience to the economic ups and downs. However, this ability to withstand shocks is to the detriment of the banks' profitability, which remains weak.

Israeli businesses have been skilled at coping with fluctuations in the economic cycle and any potential credit squeeze. Coface's payment experience for the country is positive and higher than the world average.

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