Coface Group
Israel Israel
Population 7.871 million
GDP 272.737 US$ billion
A3
Country risk assessment
A2
Business Climate
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Synthesis

major macro economic indicators

  2011 2012 2013(e)  2014(f)
GDP growth (%) 4.6 3.4 3.5 3.3
Inflation (yearly average) (%) 3.4 1.7 1.6  2.2
Budget balance (% GDP) -3.3  -3.9  -3.5  -3.0
Current account balance (% GDP)  1.2  0.3  2.2  3.0
Public debt (% GDP)  73.0  68.5  66.5 63.5

 

(e) Estimate (f) Forecast

STRENGTHS

  • Open and diversified economy, strengthened by the country’s admission to the OECD in 2010
  • Industry dominated by high-tech products
  • Highly skilled labour force
  • Political and financial support from the United States and the diaspora
  • Natural gas production since mid-2013 from large offshore reserves

WEAKNESSES

  • Political fragmentation and weak coalition governments
  • Stagnation on peace talks between Israel and the Palestinians
  • Insecurity undermining economic potential 
  • Relatively high public debt 

Risk assessment

 

Fragile new coalition government and growth expected to decline slightly in 2014

The early parliamentary elections at the end of January 2013 led to a weakening of the conservative bloc, led by the outgoing prime minister, Benyamin Netanyahu – of the right-wing Likud Party allied with the ultranationalist Israel Beitenu group – and to the rise of a new centrist party, Yesh Atid (Future Party). The new coalition government formed in March by B. Netanyahu – with the addition of centrist parties, among them Yesh Atid, and of a recently formed ultranationalist party, Bayit Yehudi (Jewish Homeland), to the detriment of the ultra-orthodox parties – is therefore weak, because it is composed of members with different political opinions and competing interests.

 

Economic growth is expected to decline slightly compared with 2013, with private consumption suffering from planned tax increases. However, production and investment will be stimulated by the expansion of the gas sector, after the start of operations in April 2013 on the offshore Tamar field. 

 

Fiscal austerity and comfortable external financial situation

In late 2010 the authorities adopted a biennial fiscal budget in an attempt to limit parliamentary debate related to the existence of precarious government coalitions. The new coalition government favours on the whole the same economic direction as the previous one, which advocated economic liberalism, chiefly through public spending cuts and privatisation. It will be making budget cuts, particularly in social spending, but also introducing tax increases, despite the unpopularity of such measures, in order to achieve a deficit reduction in 2014. No real structural reforms are planned, however, and the main public spending items will still be debt servicing, defence and education, while the public debt to GDP ratio will diminish slightly.

 

The trade deficit is forecast to narrow further in 2014, despite an appreciation of the shekel, which is hurting Israel’s sales. Exports of goods to Israel’s main trading partners, Europe and the United States (each about a third of the total) will grow moderately, but sales to Asia (20% of the total) will increase a little more significantly. As for imports, those of hydrocarbons will decrease appreciably because Israel plans to greatly reduce its dependence on them by expanding local gas production. Moreover, the growth of services to businesses – mainly software and high tech products – will be modest, while tourism is fairly healthy. Overall, the current account surplus will be consolidated, while the country enjoys a sound external financial situation thanks to easily manageable external debt (ratio of 30% to GDP forecast for 2014) and a substantial level of foreign exchange reserves (expected to represent 10 months of imports[C1]  by the end of 2014).

 

Weak growth outlook for business activity

The overall growth outlook for business activity in 2014 looks likely to be weak, apart from the specific hydrocarbon sector. Manufacturing, particularly in pharmaceuticals, will post limited growth due to a modest increase in sales on the domestic market but also in exports because of the appreciation of the shekel.  The sales of business services will also increase moderately both in Israeland abroad. Distribution will be hit by the squeeze on household consumption due to the policy of fiscal austerity, but activity should remain fairly sustained in the sectors of transport and communications. Growth is expected in hotel sector as tourism is set to climb slightly. [C2] Finally, the rate of growth in the construction sector could accelerate, due particularly to the new government’s housing programme.

 

Strength of the banking system and businesses’ good financial situation

Highly concentrated and favouring domestic business, the banking sector is strong. It is well capitalised with a limited portfolio of non-performing loans, but excessively prudent management means profitability is mediocre.

Israeli businesses are standing up fairly well to the vagaries of the economic cycle and to any credit restrictions. They are in a reasonable financial position and Coface’s payment record too is generally a bit better than the world average.

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