Israel: Risk Assessment
Country Risk Rating
Business Climate Rating
- Technology hub of the region
- Solid institutional structure, positive business environment
- Very competitive production tissue, diversified economy with a large number of start-ups
- Strong international reserves, low inflation
- Improvement of relations with some of the Arab neighbors
- Weaker fiscal dynamics, higher government debt
- Increased regional tensions
- New elections fuelling political uncertainty
Global growth and smoother regional relations will sustain the economic recovery
Helped by the global economic recovery and gradually rising trade volumes in 2021, Israel’s economy is expected to recover from the contraction of 2020, although in a very progressive way. The pre-COVID-19 production level should be reached only after 2021 as, according to the authorities, the economy is expected to lose around USD 1.3 billion per week from the third lockdown implemented in late December 2020. The significant vaccination campaign (15% of the population has been vaccinated in around two weeks) is expected to accelerate the process of freeing the economy from lockdown periods. Thanks to the reopening of the global economy, Israel’s exports jumped by 64% on a quarterly basis in the third quarter of 2020, following a drop of 28.5% in the second quarter. Nearly 30% of exports are towards the United States, and 35% to Europe and Central Asia. Consequently, the pace of recovery in those economies will be determinant for Israel’s exports and their contribution to growth. The Leviathan field, which delivered its first gas output to the domestic market in December 2019 and its first exports in January 2020, will continue to support Israeli exports. The volume of dry natural gas exports is expected to reach 11 billion cubic meters (bcm) in 2021 compared to an estimated 5.8 bcm in 2020. Private demand, which accounts for over half of GDP, is expected to recover due to the reopening of the economy, but the high level of unemployment (18.2% as of October 2020 compared to 12.4% in September 2020) will weigh on consumer confidence and, thus, on personal consumption. However, growth will be constrained by subdued tourism revenues, which amounted to USD 8.7 billion in 2019 (2.2% of GDP). On the other hand, Israel has signed normalization agreements with the United Arab Emirates (UAE) and Bahrain in late 2020, which provides important trade and investment opportunities. The deal would allow Israel to find new markets for its high-tech products, food products, and to attract tourism flows and key investments, the latter primarily in the pharmaceuticals, chemicals, and security areas. The deal may also enable Israel to access energy at a discounted price.
Current account surplus set to persist, supporting international reserves
Israel’s current account surplus declined in 2020, as goods exports fell more than imports, and tourism revenues declined under lockdowns and border closures during the COVID-19 pandemic. The current account surplus is expected to widen in 2021 thanks to rising gas exports and external demand, in line with the global economic recovery. The still low level of tourism revenues would be compensated by the increase in Israel’s pharmaceuticals, high-tech and services exports. The rising current account surplus is expected to support the shekel. After strengthening by nearly 8% versus the USD in 2019, the shekel firmed by another 3% between January and November 2020, reaching a nearly 10-year peak despite the sharp economic contraction. The shekel appreciated by around 2.5% in 2020 against a basket of currencies of Israel’s largest trading partners. This pushed the central bank to intervene by buying USD 14 billion on the foreign exchange market. As a result, the central bank’s currency reserves rose to USD 161 billion (around 40% of GDP). Strong reserves and external accounts, and a high level of savings in Israel (estimated at about 25% of GDP in 2020) constitute a resilient buffer for the Israeli economy against the negative spillovers of COVID-19.
Nevertheless, the fiscal challenges will persist. Despite the expected rise in revenues thanks to the economic recovery, the deficit is set to remain wide. The political uncertainties (Israel will hold the fourth election in only two years) create an obstacle for the introduction of measures aimed at countering the fiscal deficit, and, therefore, expenditure should remain high. The termination of the stimulus package (initially about 6% of GDP would help the government to reduce the budget deficit. However, the high level of unemployment will continue to restrain fiscal revenues. Finally, 17% of the government debt (of 917 billion shekels) was denominated in foreign currency in 2020.
Fourth election in only two years
In December 2020, after the government failed to pass the annual budget through parliament due to the disagreement between Prime Minister Benjamin Netanyahu and his coalition partner Defence Minister Benny Gantz, the Knesset (Israel’s parliament) was automatically dissolved as required by law. Consequently, Israel will hold an election in March 2021, which increases the already high political uncertainties. On the other hand, the signature of the normalization agreements with the United Arab Emirates and Bahrain will benefit Israel in terms of security and potential information sharing amid increased regional tensions.