Merrill Lynch today issued an update on the Israeli economy, entitled "Israel - Entering a Volatile Period." Emerging markets strategist Mehmet Simsek termed Minister of Finance Benjamin Netanyahu's resignation, "negative." Despite recent speculation that it could occur, Sismek noted, "the timing was a bit of a surprise."
"In our view, Netanyahu's abrupt resignation is negative and may herald a politically more volatile period in Israel. It could strengthen the opposition to Prime Minister Sharon's disengagement plan and we believe increases chances of early elections. We remain optimistic that the disengagement will go ahead as planned, but the process could be noisier.
"The Israeli economy continues to expand at a respectable pace despite rising noise over the Gaza pullout and high energy prices. We stick to our real GDP growth estimate of 3.8% for this year. While we expect the economy to remain on a reasonably firm footing beyond this year, we are getting a tad more bearish on the outlook for 2006, mainly because the world economy is now projected to grow at a slower pace.
"Underlying inflationary pressures remains contained. However, the headline inflationary pressures are likely to edge higher in the near-term, reflecting a weaker shekel and higher fuel prices. Overall, inflation should remain with the central bank target range of 1-3%.
"We maintain our view that Israel's external balance is healthy and its export sector is fairly competitive, reflecting a significant real exchange rate depreciation over the past few years and rising productivity. Israel's current account balance, which posted a surplus of US$1.7bn or 1.5% of GDP in 2004, is likely to stay in the black.
"Year-to-date Israeli fiscal performance is impressive. The budget deficit for January-July totalled a mere 9% of the full year deficit target. We remain optimistic that the government will maintain fiscal prudence in 2006. A continuation of the recent trend would put the fiscal deficit at just under 3% of GDP, a level that is acceptable throughout the industrialised world.
"The Israeli shekel, which has recouped some of the lost ground in July, remains vulnerable in the short-run as investors become increasingly focused on political risks associated with the disengagement plan and Netanyahu's sudden resignation and narrowing yield differential with the rest of the world.
"The Bank of Israel is likely to remain on hold through September, but it is beginning to sound a tad more hawkish. We now expect the bank to tighten by 75bp over the next six months."
Merrill Lynch's analysts said they were neutral on Israeli equities and local currency bonds, and made no trade recommendation for shekel.
Published by Globes [online], Israel business news - www.globes.co.il - on Tuesday, August 09, 2005