Israel: Risk Assessment
Country Risk Rating
Business Climate Rating
- Industry dominated by high-tech products
- Highly skilled workforce
- Political and financial support from the United States and the diaspora
- Natural gas production since mid-2013 from significant offshore reserves
- Political fragmentation and fragile government coalitions
- Peace talks between Israel and the Palestinian Territories are at a standstill
- Fairly high public debt
Private Consumption and Investment Driving Lively Growth
After slowing in 2017, mainly because of an unfavorable base effect, activity should maintain its solid performance in 2018. Growth will be driven by robust private consumption, which accounts for 55% of GDP. With a very low unemployment rate (about 4%), rising participation in the labor market and real wages on the up, household confidence is on a high. Moreover, with higher tax receipts in 2017 and in the run-up to the parliamentary elections (2019), fiscal policy is likely to be more expansionary in 2018. As a result public investment is expected to grow. In addition to social security and health spending, infrastructure investment linked to the start of production at the offshore gas field Leviathan, in late 2019, will boost growth. To tackle the housing shortage, public policies could also be introduced to support the construction sector. The outlook for private investment remains positive, particularly thanks to the central bank’s accommodative stance. The sector could benefit from opportunities offered under the USD 28 billion infrastructure modernization plan, especially concerning transport, presented by the government in September 2017. On the other hand, higher imports and modest export growth in pharmaceuticals, innovation (ICT, electronics) and chemicals are expected to limit the contribution of external trade to growth. Indeed, a strong shekel is likely weigh on export recovery.
Robust internal demand, given rising wages and higher prices for imported goods, energy in particular, will contribute to positive, but weak, inflation.
Expansionary Fiscal Policy will Widen the Deficit
After reducing in 2017, in connection with an exceptional increase in revenues, the fiscal deficit will widen in 2018. This deficit increase can be put down to higher public spending. The areas of social security, healthcare and education are likely to receive a greater emphasis in the run-up to the elections. Infrastructure spending, especially on public transport and the electricity distribution system, will also contribute to the rise in the deficit. The one percentage point cut in corporation tax, bringing it down to 23%, together with the cut in income tax is expected to slow the growth in revenues. This deficit increase should stop the downward trend of the public debt observed over the past ten years. However, this should not threaten the country’s capacity to borrow at relatively low rates on both the domestic and external market.
The current account balance is expected to continue to show a surplus in 2018, despite a worsening balance of goods. Imports, particularly of fuel and capital goods, are expected to rise more strongly than exports. The latter, having been hit by the appreciation of the shekel, should continue their modest recovery. The income balance is also likely to remain in deficit due to payments made to non-resident, notably Palestinian, workers. Nevertheless, the balance of services, thanks to tourism, and the balance of remittances, from the United States and the diaspora in particular, will push the current account balance into positive territory.
The Status of Jerusalem Threatens to Reignite the Israeli-Palestinian Conflict
Reappointed as Prime Minister following the parliamentary elections won by the Likud Party in 2015, Benjamin Netanyahu leads a coalition government made up of six parties. Directly or indirectly the target of several investigations over allegations of corruption and conflict of interests, the Prime Minister’s position could be weakened in the run-up to the 2019 elections. Moreover, the issue of military service for the orthodox community, currently exempted, could create turmoil between the religious and secular parties in the coalition, after the Supreme Court ruled in September 2017 that the Knesset (Israeli Parliament) had one year to pass legislation to ensure that the principle of equality was being respected. In addition, an international effort, led by the Trump administration, to restart the Israeli-Palestinian peace process, could reawaken internal friction within a weak and disparate majority. The conclusion of a peace deal seems a very distant prospect, especially after the US decision, in late 2017, to recognize Jerusalem as the capital. This decision, rapidly followed by a call for Intifada by Hamas, threatens to escalate the Israeli-Palestinian conflict. Apart from the conflict, diplomatic relations are likely to be enlivened by convergence with the United States and Saudi Arabia over concerns about Iran’s ambitions in the Middle East. Nevertheless, relations with Jordan, with whom a peace agreement was signed in 1994, are tense following a deadly incident at the Israeli embassy in Amman in July 2017.