カントリーリスク評価
Israel

Israel

Population 9.2 million
GDP 44,181 US$
A2
Country risk assessment
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 3.8 -2.2 7.0 4.0
Inflation (yearly average, %) 0.8 -0.6 1.5 1.8
Budget balance (% GDP) -3.9 -11.4 -7.0 -4.5
Current account balance (% GDP) 3.4 5.4 4.5 3.5
Public debt (% GDP) 59.5 72.0 73.0 73.0

(e): Estimate (f): Forecast 

STRENGTHS

  • Very competitive high-tech sector
  • Weak inflation allows for low interest rates, which stimulates investments
  • Diversified economy and highly integrated into global trade
  • High level of international reserves
  • Approval of the 2022 budget by the Parliament, a first in more than three years
  • Establishment of diplomatic relations with some Arab countries, supporting investment opportunities

WEAKNESSES

  • Dangerous geopolitical environment
  • Small economy
  • Concentration of exports on Western countries
  • High level of public debt
  • Strongly divided and fragmented political landscape leading to political instability and frequent snap elections

Risk assessment

Resilient economy, despite easing momentum in 2022

In 2022, the Israeli economy will continue to benefit from the rapid vaccination campaign, one of the fastest globally. As of late 2021, 62% of total population had been fully vaccinated. The removal of restrictive measures in line with this steady vaccination rollout will continue to support    private consumption (around 50% of GDP) that will be the key driver of growth. In line with the “re-opening”, the unemployment rate fell to 5.2% as of September 2021 compared with 5.5% earlier that year. Although unemployment runs above the pre-pandemic level of 3.5-4%, the improvements on the labor market will help consumer sentiment and support households’ spending. Investment (20% of GDP) is expected to grow in 2022 on the back of offshore gas infrastructure attracting foreign companies. In April 2021, Abu Dhabi’s Mubadala Petroleum announced that it had finalized a deal of USD 1.025 billion with Delek Drilling for a 22% stake in the Tamar gasfield. The resilient high-tech sector will continue to be a bright spot attracting venture capital. In the first three quarters of 2021, Israel’s high-tech sector raised a total funding of USD 17.78 billion through 575 deals, doubling the amount of 2020, according to the IVC-Meitar Israel Tech Review. This trend is expected to continue in 2022, including on the back of rising need for clean technology. Investments in construction will also continue through several projects such as City Gateway, construction of new business zones in East Jerusalem, southern section of the M1 Tel Aviv metro line, etc. The low level of inflation (average inflation should remain below the average of 2.3% of advanced economies in 2022) will also indirectly support investments as it allows the central bank to keep the policy rate at a low level. Inflation is expected to remain within the central bank’s targeted band of 1-3% in 2022. Consequently, the Bank of Israel may not follow a global trend of higher policy rates in 2022. On the other hand, although the Israeli economy is very export-oriented (1/3 of GDP), the pace of growth of exports may slow in 2022 due to global semiconductor shortages, which can be a drag on high-tech exports. The strong base effect from 2021 will also contribute to a slowdown in the headline growth in 2022. Nevertheless, the growth performance will remain above the pre-pandemic five-year average of 3.4%. 

 

Healthy external position, narrower fiscal deficit

The slowdown in goods exports, pricier imports of raw materials, chemicals and metals, and a slow recovery in tourism revenues will expand the trade deficit and drag down the current account surplus. Nevertheless, the external position will continue to remain healthy. Tourism revenues, which used to account for around 2% of GDP before the pandemic, should reach only 1% in 2022. However, the services account will remain in surplus on the back of computing services, research and development. Those, as well as electronic components, communications equipment, and precision and medical equipment, will continue to be the key pillars of the resilient external surplus. The primary income balance will remain in deficit mainly due to income repatriated by foreign companies, while the secondary income balance will keep its surplus thanks to the diaspora’s transfers. Consequently, the country’s international reserves, standing at USD 207 billion (47% of GDP) as of October 2021, will continue to ensure the stability of Israel’s external position and encourage the central bank to intervene on the market to avoid further appreciation of the shekel.

 

The passing of the 2022 budget by the Parliament in November 2021 will improve Israel’s short-term fiscal outlook. The fiscal spending will decline in line with the withdrawals of COVID-related expenditures (mostly due to the rollback of 68.6 billion shekels in healthcare costs). The easing of subsidies in agriculture will also trim spending. Higher tax revenues in line with strong economic growth and new taxes (tax on disposable plasticware and sugary drinks) will also contribute to the narrowing of the fiscal deficit in 2022. This will result in a stabilization of the public debt burden. Public external debt, which increased from 24% of GDP in 2019 to 33% in 2020, will not cause a balance of payment risk thanks to the strong international reserves of the central bank.

 

The heteroclite government coalition seems to hold

The coalition sworn in in June 2021 includes eight parties from different political factions, which could be a sign of fragility as they may have difficulties to follow common interests. However, the passing of the budget showed the coalition’s ability to act commonly.   The government is expected to continue improving ties with the United Arab Emirates, Egypt, Morocco, Sudan and Bahrain, providing new investment opportunities and financing for Israel. On the other hand, Israel will remain reluctant to the revival of the nuclear deal with Iran. However, given U.S. President Biden’s willingness to resume negotiations, this may harm the relations with the U.S.  

 

Last updated: February 2022

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