International rating agency Moody's has responded to the first quarter growth figures released by Israel's Central Bureau of Statistics last week showing that the Israeli economy grew at an annualized rate of only 0.8% during the quarter. Moody's analyst Kristin Lindow notes that this was down from 3.1% in the fourth quarter of 2015 and well below expectations. Lindow stresses however that Moody's is not taking any credit rating action, and that its rating for Israeli government bonds remains at A1 with a stable outlook.
"The latest figures suggest recurring economic underperformance as the economy’s export engine remains under pressure from the continued real appreciation of the shekel. The pace of growth in all but two of the last seven quarters has come in below the 3% potential growth rate estimated by the IMF. Moreover, this was the third time in the same period that growth failed to reach 1% annualized.
"The below-par growth outcomes add uncertainty to the authorities’ 2.8% growth assumption and in turn the 2.9% of GDP fiscal deficit target for this year. In turn, a worse fiscal outcome would imperil the continued improvement in the government's debt metrics," Lindow writes.
Besides the strengthening of the shekel, which continues to hit Israeli exports despite the Bank of Israel's measures, Lindow finds that "spillovers from the divisive political scene and regulatory hurdles" are preventing reforms and constraining growth in the Israeli economy. "Last year, the government operated for 11 months without a budget due to internal coalition disagreements, which were finally resolved in November. In the interim, the government was forced to keep spending at the previous year’s monthly levels. Although this was not contractionary per se, spending was lower than the fiscal rule would have allowed had a budget been implemented, resulting in a lower-than-planned fiscal deficit," Lindow's report notes.
"Politics also prevented the implementation of a key reform measure passed by the previous government requiring Haredi (ultraorthodox) men to enter into the work force. Difficulties in reaching a budget consensus with religious supporters of the government led to that measure being overturned last year. That decision is likely to hamper growth by forestalling the potential upside from a greatly expanded work force if Haredim, who are forecast to represent 12% of the working-age population (25-64 years) by 2030, were brought in.
"Finally, the development of Israel’s substantial offshore natural gas resources - particularly the mammoth Leviathan field - has been delayed because of a regulatory roadblock related to competition law. The field is expected to provide Israel with both a secure long-term energy supply and a source of exports to other countries in the region, notably Egypt and Turkey," the report states.
On the Israel's fiscal position, Lindow writes, "Thus far, despite the economy’s recent underperformance, the fiscal position remained strong and the government debt-to-GDP ratio has continued to improve. The latest figures show that the ratio fell by 2.1 percentage points in 2015 to 64.6% as the lack of a budget kept spending down. Meanwhile, the deficit for the 12 months ending April 2016 came in at 2.2% of GDP, partially driven by a surplus in the first quarter of 2016, compared to the 2.9% projected for the full year.
"However, we highlight that the first part of the year is seasonally stronger, given the bunching of government spending towards year-end, and the strict constraints that existed through most of the second half of 2015 which will not be a factor this year. Inevitably, however, the persistent weakness of the economy and the sacrificing of structural reforms for political considerations could yet threaten the government’s other objectives, most notably fiscal consolidation.
"Therefore, at the same time that the authorities are contemplating early preparations for a two-year budget for 2017 and 2018, early signs that growth will again fall short of expectations imply that longer-term fiscal goals could be similarly unrealistic without the adoption of longer-term tax and administrative reforms."
Published by Globes [online], Israel business news - www.globes-online.com - on May 23, 2016
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