Israeli industry is managing successfully with the strong shekel, sovereign analysts from S&P Global Rating assigned to rate Israel say. They say that it is too early to tell whether the current leveling off of housing prices is a change in trend or only a temporary correction, but that a real solution to the housing crisis is still far off, with the cumulative shortage of housing amounting to 150,000-200,000 housing units.
S&P Global Ratings analysts Kai Stukenbrock, Senior Director, Analytical Manager, Sovereign Ratings, and Karen Vartapetov, Director, Lead Analyst, Sovereign Ratings, came to Israel last week on their annual visit ahead of the publication of their rating review in August. The Bank of Israel yesterday upwardly revised its growth forecast for 2017 from 2.8% to 3.4%, stressing the improvement in exports of goods and services and in investment, two areas that were relatively weak in its previous assessment. Governor of the Bank of Israel Karnit Flug said that economy was still growing at a 4% annual clip.
"Globes": Industrialists in Israel are complaining that the strong shekel is killing conventional industry and detracting from exports of goods.
"The fact that exports of goods have not fallen, despite the strong shekel, highlights the resilience of Israeli industry and its ability to handle the challenge," says Etai Rappel, who is responsible for coordination between S&P's rating team and parties in Israel. Rappel says that there has been no reduction in activity in Israel even among companies that have opened overseas production lines and activity.
Vartapetov: "I prefer to put it the other way around: the economy is making the shekel strong. Exports of services have demonstrated great ability to withstand the strong shekel. It's true that conventional industry is less resilient, but not to an alarming extent."
Stukenbrock: "The fundamental data for the Israeli economy support the strong shekel: the balance of payments surplus, very impressive direct investment, above-average growth rates, and a very expansionary monetary policy in Europe and Japan."
The Bank of Israel justifies its purchases of dollars by the need to offset the effect of these central banks, which are in effect conducting a currency war.
Stukenbrock: "The central bank can intervene in the foreign exchange market. Another possibility is to set up a sovereign wealth fund – we understand that there are plans for founding such a fund, which will start operating towards the end of the current decade (the Bank of Israel believes that the fund will not operate before the next decade, A. B.). The Bank of Israel can't do much, however, about structural changes and measures to boost productivity or to make it easier to do business.
"Israel is fairly low on the World Bank's index for doing business. For example, its rating in registering a property is very low, and when you examine why, you discover that prices began rising rapidly after the 2008 crisis, and that the response of increasing the supply lagged far behind. When you ask why the market responded with such a delay, they explain that it simply takes many years. Some of that is due to bureaucracy and planning procedures."
What is your opinion on government housing policy?
Stukenbrock: "We have seen very rapid prices rises, with housing prices doubling since 2007. On the other hand, we've seen a very strong response from policymakers since 2014. We've seen the mortgage interest rate climb, and we've seen a great many governmental measures on the supply side and on the demand side, leading to a steep drop in activity by investors. We've seen assessments that investors are selling more housing units than they're buying. In recent months, we've seen the market cool off to some extent, while it's not clear yet whether this is a change in trend or a correction."
Vartapetov: "The housing market is very complicated, and there's no magic solution. The impression is, however, that the government is very aware of this, and is using all its ammunition - releasing land, acting against speculation - these things take time. You had a decade in which the pace of construction did not catch up to the demand, and a very wide gap opened up that will take time to close. The numbers we saw show that 150,000-20,000 housing units are lacking."
Rappel: "People expect prices to fall in Tel Aviv, but it won't start there. The effort to increase supply is focusing on the suburbs. Army camps are being moved to the south, and areas are being vacated in Herzliya and Rishon LeZion. That also requires infrastructure development - these things take time."
A feeling of complacence
S&P's rating for Israel has not changed since it was upgraded to A minus in 2011. The ratio of public debt to GDP – the main criterion in a country's rating – has since fallen from 69% in 2011 to 64.6% at the end of 2016. Lowering the ratio of debt to GDP was also a significant achievement because it ran counter to the trend in most Western countries.
Isn't there room for consideration of an upgrade in Israel's credit rating, given the improvement in its debt ratio?
Stukenbrock: "We've seen an impressive decrease in the debt-GDP ratio, but what we have to check before upwardly revising a rating is whether the debt fell as a result of the business cycle, or because of government fiscal policy. This question is more acute this year, when we are expecting a drop in the growth rate and some rise in the deficit (compared with 2016, A.B.).
"Meanwhile, we see that the government is using its surplus revenue to increase spending, not to reduce debt. Incidentally, we were surprised to see that the public debt and the budget deficit were not a subject of public discussion, as they are in Germany and the US, for example."
The impression gained from the talk with the people from S&P is almost one of complacency. For example, they are not particularly disturbed about the increase in financial risk, which was reflected in the narrowing of corporate bond spreads to an all-time low. They say that this is a worldwide phenomenon resulting from a very expansionist monetary policy.
Published by Globes [online], Israel Business News - www.globes-online.com - on July 13, 2017
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