Barclays Capital warns that while Israel's economic trends remain relatively strong, they are declining, and growth will probably slow in the next few quarters, but the country will avoid a recession. Noting that the current accounts surplus has disappeared and that inflation has decelerated, it predicts that the budget performance will be worse than expected in 2011 as tax revenues have disappointed.
The review of Israel is included in Barclays' quarter review of emerging markets, entitled, "Glass half full - Take a sip". Barclays says, "We are adopting a more constructive stance toward emerging asset markets, on valuation grounds and on the view that Eurozone policymakers are at last converging on a policy framework that can restore financial stability to the region."
Barclays predicts that the Bank of Israel will cut the interest rate by 50 basis points within six months, to 2.25%, after cutting it by the same amount in the past three months. Further interest rates are possible "if we take into account that these cuts might not mark the end of the easing cycle, given uncertainty about when the Israeli economy will bottom out."
Barclays cautions, "It is uncertain how much growth can withstand further global economic deterioration. Indicators imply a further deceleration is occurring. With the strong starting position and Israel’s likely lower vulnerability to Europe , the country is in a good situation to avoid recession, in our view. Only one-third of its exports are to Europe with large exports to the US and Asia. External debt levels are low (41% of GDP). With persistent C/A surpluses resulting in large reserves buildup, Israel is a net creditor. The banking system is mostly Israel owned, foreign ownership of government debt is minimal, and government external debt is long maturity. We expect that deceleration in the global economy will lower Israeli GDP growth in 2012 to 2.5% from 4.8% in 2011. We then estimate that growth will accelerate in 2013 to 3.3%, but acknowledge downside risks to our forecasts (especially for 2012) depending on when a global recovery starts."
Barclays adds that the changing macroeconomic climate has forced the Bank of Israel to reverse course. "Until mid-2011, the Bank of Israel had been focused on lowering inflation. The Bank of Israel had increased its policy rate to 3.25% from the low of 0.5% in 2009. The government and Bank of Israel put in place specific policies to cool down housing markets. Supply measures were aimed at raising housing construction and demand side measures were designed at limiting bank mortgage loans. The policies have been successful, as construction has increased and tighter banks lending standards have led to a slowdown in housing loans and overall credits. However, housing inflation in the CPI will probably remain high, as it reflects rents more than housing prices. Another factor affecting prices are the “Tent Demonstration” protests against higher prices, which has induced some businesses to hesitate to raise prices.
"The Bank of Israel is now in a clear rate cut cycle, having cut rates twice by 25 basis points each (at the September and November rate meetings) to 2.75%. The Bank of Israel thinks that Israel’s growth will ease, due to the euro area debt problems and an expected slowdown in global growth. At the same time, the Bank of Israel emphasized that Israel’s housing price inflation is showing signs of moderation (as opposed to rents). With inflation and growth lessening over the next few months, we expect further the Bank of Israel rate cuts of 25 basis points in each of first and second quarters of 2012."
Finally, Barclays warns that Israel is facing increasing political risks, which will make it harder for the government to achieve its goal of a 60% GDP-to-debt ratio in 2020. Although Israel will probably continue lowering its fiscal deficits through 2013, the deficit is being squeezed from revenue declines and expenditure increases. Government assurances that the 2.5% annual budget increase will be kept has been made more difficult by adoption of Trajtenberg Committee measures, formulated in response to the “Tent Demonstrations”, which mandates increased social spending, and which will be offset by a cut in defense spending.
Barclays warns of Iran’s development of nuclear capabilities, political instability in Egypt and Syria and the deterioration of relations with Turkey, continued instability in Lebanon, and relations with the Palestinians that are unlikely to improve. Finally, domestic politics remain in flux with social protests unresolved.
Published by Globes [online], Israel business news - www.globes-online.com - on December 7, 2011
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