Israel: Risk Assessment
Country Risk Rating
Business Climate Rating
- Very competitive high-tech sector
- Diversified economy, resilient, and highly integrated into global trade
- High level of international reserves
- Establishment of diplomatic relations with some Arab countries, supporting investment opportunities
- Decreasing public debt to GDP ratio, strong external accounts
- Dangerous geopolitical environment
- Small economy
- Concentration of exports on Western countries
- Lack of workers in key sectors such as manufacturing and high-tech
- Structural shortage in housing sector due to the gap between low supply and rising demand
- Strongly divided and fragmented political landscape leading to political instability and frequent snap elections
RESILIENT ECONOMY DESPITE EASING MOMENTUM
The Israeli economy will be affected by the global economic slowdown. After a contraction of 1.8% in the first quarter of 2022, the economy expanded at an annualized 6.8% in the next quarter as easing COVID-19-related restrictions contributed enormously to economic activity, mainly via tourism, transportation, and the hospitality sector. During the rest of 2022, the carry-over impact from 2021 continued to support growth performance. In 2023, activity will expand at a slower pace. This should be mainly due to slower external demand and higher inflation weighing on private consumption (50% of GDP). On the other hand, rising production costs and labor shortages may impact investments (20% of GDP). Between April and October 2022, the central bank raised its benchmark rate and delivered a total hike of 265 basis points to 2% to counter rising inflation, which jumped to a 14-year high of 5.2% in July 2022. Consequently, the average monthly introductory interest rate on loans had grown close to 3% by the end of August 2022 compared with 1.6% at the start of the year. With globally high commodity prices, elevated rents due to housing shortages, and a robust labor market (the jobless rate is around 3.5%), inflation was expected to remain above the central bank’s target range of 1-3% until the end of 2022. One-year inflation expectations show inflation could stay close to the upper threshold of the central bank target. Consequently, monetary policy is expected to remain tight in 2023, raising company financing costs. Additionally, although exports (1/3 of GDP) rose by around 22% in January-August 2022 period from a year earlier, the slowdown in the US economy (around ¼ of Israel’s total exports) and China (nearly 10% of total exports) and rising recession risks in the Eurozone will dampen demand for Israel’s export products, including high-tech goods, machinery, and chemicals.
HEALTHY EXTERNAL POSITION, NARROW FISCAL DEFICIT
Although Israel is partly isolated from rising commodity prices thanks to its domestic gas production (estimated to stand close to 24 cm in 2022), the slowdown in goods exports due to global recession risks and the slow recovery in tourism revenues expanded its trade deficit and dragged down its current account surplus in 2022. Nevertheless, its external position will continue to remain healthy. Tourism revenues, which used to account for around 2% of GDP before the pandemic, should reach only 0.8% in 2022 and nearly 1% in 2023. The services account will remain in surplus on the back of computing services, research, and development. Those, as well as electronic components, communications equipment, precision and medical equipment, diamonds, and agrochemicals, will continue to be the key pillars of the resilient external surplus. The primary income balance will remain in deficit mainly due to income repatriated by foreign companies, while the secondary income balance will keep its surplus thanks to the diaspora’s transfers. Consequently, the country’s international reserves, standing at USD 192 billion (37% of GDP) in August 2022, will continue to ensure the stability of Israel’s external position.
Following the passing of the 2022 budget by the Parliament in November 2021, Israel’s budget surplus for the twelve months to the end of August 2022 stood at 0.6% of GDP. The formation of the Likud-led coalition in Parliament is expected to pass the 2023 budget, eliminating fiscal uncertainty. Tighter monetary policy, slower growth, and rising inflation are likely to weigh on consumption taxes, while a possible increase in public sector wages in 2023 should increase spending. This will result in a light fiscal deficit in 2023 while the public debt burden should stabilize.
RIGHT-WING COALITION WINS THE ELECTIONS
The victory of the right-wing coalition led by former Prime Minister Benjamin Netanyahu in the November 2022 elections is expected to facilitate policy-making as it is based on similar ideological factions. Improving ties with the United Arab Emirates (UAE), Egypt, Turkey, Morocco, Sudan, and Bahrain will continue to provide new investment opportunities and financing for Israel. In September 2022, Israel began talks with Bahrain over a free trade agreement after signing one with the UAE in May, which is estimated to increase trade to USD 10 billion over five years, up from USD 1 billion currently. Israel will remain reluctant to revive the nuclear deal with Iran. Additionally, the country will continue to face security risks due to the instability in Syria, where Iran is increasing its presence. The relationship with the Palestinian Arab population will continue to be marked by outbursts of violence.