International credit insurance company Coface has published a review of the Israeli economy in which it sees higher spending widening the fiscal deficit. Coface ranks the Israeli country risk assessment and the Israeli business climate at A2 level, its second highest rating.
On the fiscal deficit, Coface writes: "The government set the fiscal deficit target to 2.9% of GDP for 2019, but Israel’s social security agency’s decision to cancel its agreement to transfer its annual surplus to the budget starting in 2019 may further boost the fiscal deficit. Such a move would mean the government would lose a resource of close to USD 7 billion, which could widen the fiscal deficit as high as 5% of GDP. The deficit will also be triggered by rising defence and social spending in the fields of disability benefits, education, and healthcare. The government also targets the reduction of tax burdens for families. The increase in fiscal deficit will prevent the public debt level from falling, but this should not impact the country’s borrowing capacities from domestic and international markets."
"The current account balance is expected to remain in surplus, although the surplus relative to GDP is expected to stall. Although exports, which account for about 30% of Israel’s economy, are expected to increase in the coming quarters, the strong shekel represents a challenge for further increases in exports. Import demand remains strong due to solid growth and higher commodity prices. Nevertheless, the deficit in trade balance will continue to be offset by the surplus in services trade on the back of strong exports in high tech services, such as IT consulting, computing services and software. This will help Israel’s current account to remain positive, which will in turn help the central bank to continue its interventions in the foreign exchange market and accumulate forex reserves.
Coface sees interest rates in Israel remaining low in 2019, with perhaps a small rate hike by the Bank of Israel in the first quarter. "After surging to 3.3% in 2017 and up to around 5% in the first half of 2018, private consumption will continue to support growth, thanks to the favourable employment conditions in the country, an accommodative monetary policy, a low level of inflation, and an expansionary fiscal policy," Coface writes. "Because of full employment, real wages have been driven higher (a year-on-year increase of 3.4% as of July 2018 compared with an annual inflation of 1.4%), which will continue to support private consumption in the near future. As long as inflation remains in the government’s 1-3% target range, the central bank is expected to keep its rates at a low level. Although the bank could raise its rates in the first quarter of 2019, the amount would likely be small."
As far as Israel's forthcoming general election is concerned, Coface comments, "Internally, Israel is one of the most politically stable countries in the region, and yet it is composed of a diverse society. The coalition government has decided to hold general elections on April 9 instead of November 2019 as previously scheduled. Early elections are expected to eliminate political stress and uncertainty, and to concentrate more resources on maintaining growth, and fiscal stability and discipline."
Published by Globes, Israel business news - en.globes.co.il - on March 3, 2019
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