"Israel can withstand a global recession"

Modi Shafrir  photo: Rafi Delouya

Mizrahi Tefahot Bank chief strategist Modi Shafrir believes the economy is in fine shape, and isn't worried about the fiscal deficit.

"Even though the growth rate slowed in recent months, the economy is in fine shape. Growth in Israel is not stunning, but it's also not bad. The Bank of Israel says that potential growth is 3%, and I'm inclined to agree with it," Mizrahi Tefahot Bank (TASE:MZTF) chief strategic Modi Shafrir told "Globes." "Growth in 2019 will be around 3%."

Like other economists and analysts, Shafrir expects no recession in Israel or the US this year, unless a black swan, such as another capital market crash in the US or major escalation in the trade war between the US and China, drags the global economy down, or an important security event occurs in Israel or elsewhere in the world.

Asked what supports growth in Israel, Shafrir says, "There are several factors supporting continued growth at the current level this year. Private consumption is an important engine for the local economy, and public consumption will continue to support growth, despite the recent slight rise in the budget deficit. Investment in startups, which rose significantly in 2018, will probably also continue to support growth, although this depends a lot on Nasdaq and the interest rate, because there is a clear correlation between these factors in the long term."

"Globes": What else supports economic growth?

Shafrir: "Continued growth in incoming tourism, together with continued high-tech service exports, meaning software. Here, too, however, there is a very high correlation with the state of the markets. As long as the capital markets function well, high-tech exports will grow."

What could impede growth?

"Mainly what's happening in the real estate market. Investment in home construction has been shrinking for several quarters, and in my opinion will continue diminishing in the coming quarters. An increase in imports of consumer goods, whether via the Internet or by Israelis flying overseas, also detracts from growth."

"Not enough housing is being built"

Mizrahi Tefahot grants a great many mortgages. What is your forecast for housing prices?

"All in all, we expect stable prices over the next year, although we saw a renewed rise in demand for housing in recent months. After the elections, if Kahlon is not minister of finance, demand could skyrocket, together with housing prices, but that will take time and also depends on other factors. In the long term, there is a real problem of inadequate supply. Not enough housing is being built here. Among other things, land prices in central Israel are rising because of the Buyer Fixed Price Plan. We expect stable prices in the coming year, mainly because of uncertainty."

In 2018, especially towards the end of the year, the government budget deficit rose, and probably exceeded 3% of GDP, which compares with a 2.9% government target. Minister of Finance Moshe Kahlon presented data showing that last year's deficit was 2.9% of GDP, but almost all macroeconomists believe that the Ministry of Finance manipulated the numbers.

Shafrir is not especially concerned about the increase in the deficit. "In the basic scenario, which does not include a recession, I do not expect a sharp rise in the government deficit. They may raise taxes after the elections, but not steeply. I don't see VAT going up so fast.

"Incidentally, the Bank of Israel is also not especially worried about the higher deficit. Prof. Amir Yaron, the new governor, recently said at a press conference that he looks mainly at the debt-GDP ratio, which is relatively low at present. In contrast to Karnit Flug, the current governor wants to lower tension between the Ministry of Finance and the Bank of Israel. The rise in the deficit should not be completely ignored, of course, but its significance should not be exaggerated."

What do you thing about the new governor's policy?

"In contrast to the past, when the Bank of Israel's goal was to put inflation within the 1-3% target range, the new governor says that his goal is inflation in the middle of the target range, i.e. 2% inflation. Annual inflation is currently only 0.8%. In the past, inflation slightly higher than 1% made it possible to raise the interest rate, because it was within the inflation target range. According to the new governor, interest rate hikes can wait until annual inflation nears 2%. This is very similar to the attitude of former US Federal Reserve Board chairperson Bernanke, European Central Bank President Draghi, and the central banks in Japan and the UK. They're all aiming at 2% annual inflation."

What do you think the interest rate will be at the end of 2019?

"I think that the interest rate will be at most 0.5% at the end of the year. The market expects 1-1.1% inflation in the coming year, and we predict 1% inflation this year, so the Bank of Israel has no real reason to raise the interest rate."

"We're far from a credit downgrade for Israel"

If there is a global recession, is Israel prepared for it?

"Yes. Furthermore, if there is a global recession, and we don't really expect it this year, the deficit can be increased. This is an automatic stabilizer, and has to be put into action, if necessary. Keep in mind that in the previous crisis in 2008, Israel's debt-GDP ratio was over 80%, compared with 60% today, so we're in a much better situation.

"Incidentally, if the deficit increases as a result of a global recession, I don't think that the rating agencies will downgrade Israel's credit rating. In my opinion, we're far from a rating downgrade for Israel."

Late last week, the S&P rating agency left Israel's debt rating at AA-.

What do you think about the global growth rate?

"Surveys show a general decline in expectation. Keep in mind that we're towards the end of a very long economic cycle, but I don't expect a global recession this year. Possibly in 2020. At the same time, there is a clear slowing of growth in China and Europe. Growth in the US was still good in the fourth quarter of 2018, but there, too, we saw a decline in the Procurement Managers Index in December and January."

Shekel will strengthen in the long term

What do you predict for the interest rate and the foreign currency market?

"The Bank of Israel will raise the interest rate, but at a slower pace than the market expects, because we believe that inflation will be 1% this year. As for the foreign currency market, it is difficult to predict what will happen in the coming months, but in the long term, pressure for a strengthening of the shekel against the basket of currencies will mount."


"There are several reasons. The interest rate gap between Israel and the US will narrow, while the gap between Israel and Europe will widen. The Leviathan project will begin operating in late 2019, which will decrease imports by $300 million and increase exports by $1.3 billion. Oil prices will tumble, and assuming that the upward trend does not recur, this will also have a significant effect. There is an improvement of $1.3 billion in the trade deficit. It adds up to $3 billion a year.

"Furthermore, the investment institutions are very exposed to overseas investments. When the shekel trend against the dollar changes, these institutions might sell dollars, and be joined by local and foreign hedge funds, which will obviously support a stronger shekel in the long term."

What could confound this forecast?

"Steep falls in the stock markets, which are always accompanied by a flight to the dollar, meaning investment in US bonds. In addition, a significant geopolitical event, such as a war, could influence the shekel-dollar rate."

Published by Globes, Israel business news - en.globes.co.il - on February 4, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Modi Shafrir  photo: Rafi Delouya
Modi Shafrir photo: Rafi Delouya
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