Country risk: Israel can ride out the challenges


Jeremy Weltman
Published on:

The economy has been performing admirably ahead of elections in April and a favourable risk rating is unlikely to be threatened by temporary fiscal laxness.


All smiles: Benny Gantz and Yair Lapid team up, but the outcome of the election is not all Blue and White just yet…

An uncertain period lies ahead for Israeli investors as doubts arise as to whether authorities can manage the economy without it slowing sharply, given fiscal pressures and fallout from the legislative elections to be held on April 9.

By the end of 2018, Israel ranked 30th out of 186 countries in Euromoney’s global risk table, but with the risk score falling slightly as capital access tightened.

Now the worry is that political and economic risks are also mounting. The question is whether anything will give. Euromoney’s survey contributors think not.


Political noise

The latest opinion polls reveal a drop in support for Likud, the party of Benyamin Netanyahu, whose electoral prospects have been dealt a blow by the news that attorney-general Avichai Mandelblit intends to indict the prime minister on charges of bribery, fraud and breach of trust.

This is despite a last-minute legal challenge by the party to block the decision until after the elections, allowing the Blue and White party, Likud’s main rival, to move ahead, according to the latest Times of Israel poll – signalling the indictment has notable repercussions for Netanyahu’s ability to remain PM and form a coalition.

Blue and White, led by former Israel defence forces chief of staff Benny Gantz and former finance minister Yair Lapid, favours centre-right policies supporting a united Jerusalem as the Israeli capital, the retention of settlements in the West Bank and Israeli control of the Jordan Valley.

The party differs from Likud and the more nationalist alternatives by offering to amend the nation-state law to give all religions equality.

Even if Netanyahu remains in office, assuming Likud recovers, there will be intense pressure to resign if a court case proceeds, with more than half of those surveyed in the Times of Israel poll indicating it was time for him to leave.

With the political dynamics shifting, investors might be less willing to engage until a government is formed and the policy direction becomes clearer.

And even then, the macro-fiscal metrics would appear to be somewhat more challenging.


However, one of Euromoney’s survey contributors speaking under condition of anonymity argued the economy is stronger than the political realities, and noted the fact it came through the 2009-2009 crisis with flying colours, with no recession or crisis in the financial sector, growing non-stop since 2003.

GDP grew close to potential, by 3.1% year on year in the fourth quarter, bolstered by consumer spending.

The latest Bank Hapoalim and Israeli Purchasing and Logistics Managers Association’s purchasing managers index shows a rise in December, to 57.0 from 53.7 in November, revealing a seventh consecutive month of expansion in manufacturing in response to improving production, orders and employment.

Forecasts published by the OECD point to broad-based GDP growth of 3.5% this year, with inflation of 1.4%, a stable unemployment rate of 4.1%, and a small current-account surplus – hardly the recipe for a risk rating downgrade.

Much of the expansion is coming from a highly developed and thriving high-tech sector impervious to the political cycle. There are advances in water technology and discoveries of natural gas to figure.

Of course, the situation could easily change as gradually rising interest rates subdue domestic demand – and global developments are crucial, affecting exports – but as risk experts point out, there is high population growth generating more demand and replenishing the labour supply.

That just leaves the fiscal deficit, which is seen widening, possibly beyond an upwardly revised 3.5% of GDP target for 2019, bolstered by elections spending, which will worsen the general government gross debt, rising further above 60% of GDP.

Allegations of manipulation ensuring the authorities met the 2.9% of GDP target in 2018, an outturn seemingly inconsistent with provisional figures, are under investigation by the State Comptroller.

Yet it must be appreciated the fiscal accounts will bump around a bit, especially in an election year, and are not as vulnerable to commodity price shocks, as the net oil producers are.

Analysts also point out the government recognises international credit ratings agencies follow Israel closely, which means any fiscal laxity will be corrected for.

And that means Israel’s relative risk rating is not in any immediate danger. It has a remarkably stable long-term risk score trend in Euromoney’s survey, indicating its present credit ratings seem justified.