In Morgan Stanley's most recent report on the Israeli economy, analyst Serhan Cevik paints appositive picture despite the tensions over the plan for disengagement from the Gaza Strip and Northern Samaria, due to start being implemented within less than three weeks.
"The disengagement from the Gaza Strip presents a turning point for the Israeli society. The ‘uncertainty’ surrounding Israel’s ‘disengagement’ from the Gaza Strip has been a source of tension in financial markets, but the prevailing atmosphere of gloom is not justified by political dynamics and economic fundamentals, in our view… we believe that the contradiction between emotional reactions and fundamental improvements presents an investment opportunity," Cevik writes.
"The inflation rate is still less than 1%, despite higher oil prices and a weaker currency. Following a deep recession triggered by the re-emergence of violence and the burst of the global technology bubble, the Israeli economy is now on a much stronger footing. Real GDP increased by 4.3% last year and, on our estimates, will grow by 3.8% this year, with a benign inflation outlook," Cevik's report continues.
On the government's efforts to contain the fiscal deficit, Cevik writes, "The 2006 budget framework will help consolidating public finances. Along with the recovery in global trade flows, prudent policymaking and structural reforms have lowered the country’s risk premium and sparked off output growth… even with the extra cost of the disengagement plan, the authorities are highly likely to keep the budget deficit below 3.4% of GDP and to reduce the amount of domestic bond issuance from 23.2 billion shekels in the first half to about 8.5 billion shekels in the remainder of this year. Looking forward, the government’s new budget proposal aims to lower the overall deficit to 3.0% in 2006 by maintaining a 1% growth limit on spending. "
Cevik sees no imminent interest rate hike by the Bank of Israel, despite rising US rates, and says there may even be room for cuts.
"We believe that the Bank of Israel will keep the key policy rate at 3.5% until the end of this year, even as the US Federal Reserve increases short-term interest rates towards 4.0% and then 4.5% next year, as we forecast. Indeed, we can make a case for further rate cuts in Israel, given the weakening state of the economy. For example, the central bank’s composite state-of-the-economy index posted the fifth consecutive drop this year, while the unemployment rate stands at 9.1% and real wages continue growing at snail’s pace.
"Since our computations show that the shekel is still significantly undervalued and long-term interest rates price even an inflation shock, we remain positive on shekel-denominated assets and look for a gradual inversion of the yield curve," the report concludes
Published by Globes [online], Israel business news - www.globes.co.il - on July 27, 2005