Israel: Risk Assessment
Country Rating1
Rating: A3
Business Climate Rating1
Rating: A2
Risk Assessment2
Slight deceleration of GDP growth in 2011
Israel recovered quickly in 2010 from the global economic crisis. The recovery was buoyed by domestic demand, consumption and private investment, which benefited from expansionary fiscal policy, and also by a marked improvement in foreign demand.
Economic growth is expected to decelerate somewhat in 2011 as a result of the likely slowdown in demand from the main trading partners, the European Union and the United States. On domestic demand side, household consumption will be the most dynamic component, notably spurred by public spending, whereas the growth of private investment will be very moderate.
Strong activity in construction, slower pace in the other sectors
Already driven by dynamic demand in 2010, the construction industry will continue to expand in 2011. But that expansion will be the combined result of two divergent trends: the steady rise of residential construction as opposed to the stagnation of the non residential segment, the recovery of investment notwithstanding. The manufacturing sector fared well in the recovery, particularly the high technology segment thanks to improved competitiveness and to sales in the Asian market. In an uncertain international environment, however, a growth slowdown is nonetheless expected in the industry in 2011. With consumer confidence at high levels, the very strong activity in retailing will likely continue. Growth in the hotel sector is expected to be more modest in 2011. The positive image of the transport, communication, and B2B services sectors is expected to result in their growth in Israel and abroad.
Improvement in the financial position of Israeli companies
Israeli companies in general proved resilient to the global crisis and the credit crunch, the increase in bankruptcies notwithstanding. As the economy recovered, their financial position firmed up accordingly especially with their generally prudent management policies having prompted them to set aside reserves. In this context, Coface monitoring records reflect improvement in the payment behavior of Israeli companies, which is expected to remain satisfactory and better than the world average.
Easing public sector deficit and solid external financial position
Late 2010, for the first time, the authorities adopted a bi-annual budget cycle, prompted by political motives - to limit parliamentary debate due to a government coalition - rather than economic necessity. In this framework, the public deficit is expected to be reduced to 3% of GDP in 2011 and 2% in 2012 by controlling the growth of public spending, with debt service, defense, and education remaining the key expense items. Although the public debt has remained high in relation to GDP (79% in 2010), it has been declining steadily.
The trade deficit widened in 2010 and will likely deteriorate further in 2011 with imports expected to grow faster than exports as sales decline to both Europe and the United States (each representing 30% of exports) while increasing to Asia (20% of exports). The trade deficit will be offset, however, by the upward trend of exports of business services, mainly software and related high technology products. The current account will thus remain in surplus despite a slowdown. And in this context, large foreign exchange reserves will shelter Israel from a possible liquidity crisis.
Strengths
- Open and diversified economy, strengthened by Israel’s admission to the OECD in 2010
- Industry dominated by highly intensive products technologically
- Highly-qualified labor force
- Political and financial support of US and the Diaspora
- Large offshore natural gas reserves discovered in 2010
Weaknesses
- High public debt
- Political fragmentation and weak government coalitions
- Gridlocked peace negotiations between Israel and the Palestinians
- Israel’s economic potential undermined by insecurity