Barclays Capital analysts, saying "The economy seems close to passing the turning point", see Israel's economy rebounding in 2010 to grow 2.9%, following a drop of only 1.8% in 2009.
Barclays sees a less severe recession in Israel, and relatively quick growth recovery. The investment house bases its optimism on the fact that about 75% of Israeli exports are high-tech goods, and Barclays says that a rise in the Tech-Pulse Index - showing a US high-tech recovery - points to stronger Israeli exports. The Tech-Pulse Index, measured by the San Francisco branch of the US Federal Reserve, tracks the US information technology sector.
Analysts Svitlana Maslova, Arko Sen, and Koon Chow see the Consumer Price Index (CPI) rising 2.2% in 2009, and 3% in 2010.
They see a shekel-dollar exchange rate of NIS 3.65/$ by the end of 2009, and NIS 3.6/$ at the end of 2010.
Barclays notes that Israel's trade balance turned to a $656 million surplus in the first quarter, compared with a $1.8 billion deficit (seasonally adjusted) in the corresponding quarter of 2008, after imports contracted faster (with a drop of 39%) than exports (which fell 27%).
With a strengthening economy, Barclays expects the Bank of Israel to raise interest rates in the first quarter of 2010, and believes it will be the first central bank in the region to move to rate hikes.
Barclays does not expect the Bank of Israel to extend its current program of buying Israeli Government bonds beyond its original goal of NIS 15-20 billion, and says a gradual phasing out of its dollar purchase program is also likely when a recovery in exports seems sustained.
The main concern for Barclays is the budget, although while they expect the budget deficit to be a bigger than expected proportion of GDP in 2009, they expect it to be smaller in 2010. "The high sensitivity of tax revenues to economic growth and a fragmented governing coalition has led to a proposed budget deficit of 6.0% of GDP in 2009 and 5.5% in 2010. We expect the budget deficit to be larger at 7.8% of GDP this year, as some of the tax hikes proposed by the government are likely to be rejected by the Knesset. We are more positive on the 2010 budget outlook, pencilling a 4.5% of GDP gap, as we look for the economy to grow 2.9% year over year in 2010 against the budget assumption of a 1.0% pick-up.
"The government’s commitments to increase defense, education and some other social spending are likely to preclude sharper budget deficit narrowing. While the financing is less of a concern, public debt is likely to increase to 87.7% of GDP in 2010, from 78.2% in 2008. The return to a positive dynamic in the public-debt-to GDP ratio may be delayed, creating risks for the sovereign credit rating as government has pledged to cut direct taxes starting from 2011."
Published by Globes [online], Israel business news - www.globes-online.com - on June 28, 2009
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