Israel

Asia

GDP per Capita ($)
$54336.8
Population (in 2021)
9.7 million

Assessment

Country Risk
A3
Business Climate
A2
Previously
A2 decrease
Previously
A2

suggestions

Summary

Strengths

  • Very competitive high-tech sector
  • Diversified economy, resilient and highly integrated into global trade
  • High level of international reserves
  • Establishment of diplomatic relations with some Arab countries, supporting investment opportunities
  • Overall decreasing public debt-to-GDP ratio, strong external accounts
  • Offshore natural gas and renewable energy potentials
  • Project of trade corridor between India and Europe, through KSA, Jordan and Israel
  • High tourism potential despite under-exploitation due to security risks

Weaknesses

  • Dangerous geopolitical environment, war with Hamas weighing on economic environment
  • Small economy
  • Concentration of exports on Western countries
  • Natural gas exports exposed to security issues and relationship to Egypt
  • Lack of workers in key sectors such as manufacturing and high-tech
  • Structural shortage in housing sector due to the gap between low supply and rising demand
  • Strongly divided and fragmented political landscape leading to political instability and frequent snap elections
  • Societal, political, and economic divide between the national-religious right and the secular left, widened by the government's justice reform bill
  • Unresolved problem of cohabitation with Palestinians
  • High criminality among Israeli Arabs, partly due to poverty, unemployment, and discrimination

Trade exchanges

Exportof goods as a % of total

United States of America
26%
Europe
23%
China
6%
India
5%
United Kingdom
4%

Importof goods as a % of total

Europe 28 %
28%
China 12 %
12%
United States of America 9 %
9%
Switzerland 6 %
6%
Turkey 5 %
5%

Sector risks assessments

Outlook

This section is a valuable tool for corporate financial officers and credit managers. It provides information on the payment and debt collection practices in use in the country.

Subdued growth in 2024 due to the war

The Israeli economy registered a sharp slowdown in 2023 due the war with Hamas after the Palestinian Islamist organisation launched a large-scale land, air and sea offensive against Israel from the Gaza Strip on 7 October, causing the death of thousands of people. The state of war prompted the authorities to call 300,000 reservists to duty, depriving businesses of some of their workforce, forcing some to close and resulting in reduced consumption. The Israeli economy is expected to post subdued growth in 2024, assuming that the direct impact of the war peaked in the last quarter of 2023. However, its indirect impact will continue during 2024. Risks to the growth performance remain on the downside due to the war being prolonged and to rising contagion risk throughout the rest of the region.

Moreover, persistent and fairly high living costs, the mobilisation of army reservists, the decline in employment, poor growth in the main export markets and weakening confidence in the government’s political and security agenda will weigh on domestic demand (around 50% of GDP) and exports (around 30% of GDP). Depreciation pressures on the local currency (the shekel lost nearly 3% against the USD between 7 October 2023 and mid-January 2024), the consequence of the continuing socio-political unrest and the war, could slow the disinflation process as a result of higher import prices. After raising its policy rate from 0.1% to 4.75% between April 2022 and May 2023, the central bank's 25-basis-point cut in January 2024 does not indicate it will rapidly abandon its tight monetary policy stance. Possible rate cuts later in 2024 will depend on the fiscal policy stance. On the other hand, the fact that annual inflation eased to 3% in December 2023 (the official target being 1-3%) may prompt the central bank to loosen its grip on interest rates in the coming months. Fiscal accommodation for the regions and businesses most affected by the war will help support economic activity. The manufacturing sector, in general, and high-tech services (overwhelmingly exported) will display moderate growth. However, the Israeli economy’s high level of integration with the US and eurozone markets is likely to result in poor growth in these markets. On that score, the level of new export orders pointed to a contraction between February-September 2023 according to the PMI data. Business investment will be most affected, except in the hydrocarbon and defense sectors, which benefit from high external demand amid the diversification of European energy sources, and from the wars in Ukraine and in the country. Furthermore, a continued decline in funds raised by tech companies, in addition to labour shortages, particularly for small start-ups, are other risks affecting the growth performance as the ICT sector accounts for around 20% Israel’s national output.

Tightening of financial conditions since 2022 and the war are expected to keep downward pressure on corporate profits, particularly in the ICT and construction sectors, thereby increasing non-payment risks. However, during the second half of 2024, growth is expected to improve slightly thanks to further but cautious easing of monetary policy, lower inflation permitting. Additionally, higher security risks, plus the need to renew existing infrastructures and develop social housing will drive state expenditures (around 20% of GDP).

Services will drive external surplus and public support will widen fiscal deficit

Although Israel is partly isolated from high commodity prices thanks to its domestic gas production (estimated to stand close to 27 bcm in 2023), its trade in goods will remain in deficit, compounded by weak external demand. The suspension of the gas production in the Tamar field in October-November 2023 due to war-related security concerns could, however, push Israel to seek alternative energy sources. Timid growth in the US and the eurozone (equivalent of around 60% of Israel’s good exports) will weigh on export performance. This will be compensated, partly, by a slowdown in consumer goods imports due to lower domestic demand. Nevertheless, its external position will stay healthy. The services account will remain in surplus on back of computing services (albeit it a slower pace), research and development, and tourism revenues. However, tourism revenues, which are expected to increase by 15% YoY in 2024, will remain below their pre-Covid level (2% of GDP) to reach only 1% of GDP owing to the war. Those services, as well as electronic components, communications equipment, precision and medical equipment, diamonds, and agrochemicals 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 and interest payments, despite income inflows from rising Israeli investments abroad (ILS 31 billion in 2022 vs. ILS 22 billion in 2018). The secondary income balance will keep its surplus thanks to the transfers from the diaspora and foreign governments. Consequently, the country’s international reserves, standing at USD 199 billion (around 38% of GDP) at December 2023, will continue to ensure Israel’s robust external position.

The war is expected to cost Israel USD 58 billion according to the authorities. The current government’s fiscal approach, which is based on low taxation and high social spending to support growth, and support to sectors and households most affected by the war, will push the fiscal deficit wider in 2024. Higher interest rate payments will also add to the deficit. The subdued growth performance, moderated demand for high tech products and fewer real estate transactions will weigh on tax revenues. That said, a likely increase in public sector wages and hefty public spending partly due to accommodate politically sensitive groups like the ultra-orthodox community who supports government coalition partners would increase expenses. But the risks related to the fiscal position will remain low as Israel will keep relying on easy access to domestic and international capital markets to finance the fiscal gap.

War in Gaza heightens security and political risks

Israel’s failure to achieve - for now - its objectives in this war, namely to end Hamas’ control in Gaza, free hostages, etc., suggests the war may last well into 2024. Hamas’ deadly attack on Israel and Israel’s military response which has caused tens of thousands of civilian causalities in Gaza will continue to deepen tensions with Arabs in the occupied territories. Higher security concerns may push Israel to conduct external operations to secure its borders, especially to the north in Lebanon. Additionally, Israeli bombing raids on Lebanon and Syria in response to those of Hezbollah and to eliminate prominent Hamas and Iranian leaders, the US-led international coalition bombings on the Houthis in Yemen in response to the latter’s attacks on ships using the Red Sea, and Iran’s strikes in Iraq, Pakistan, and Syria raise the risk of escalating and extending the war outside Gaza. In particular, the threat from Iran will remain high in the shape of the proxy war staged by Iran-backed groups such as Hezbollah (the Shiite Muslim political party and military group based in Lebanon), Hamas, militia groups in Iraq, and Irani forces in Syria. The rapprochement between Saudi Arabia and Israel will likely be postponed as Riyadh’s stance on normalisation is conditional on the creation of a Palestinian state. This will also test the freshly normalised relations with the UAE, Morocco and Bahrain which could continue to provide new investment opportunities and financing for Israel. Recently renewed ties with Turkey, which were broken in 2010 when Israel stormed the Mavi Marmara, a Turkish aid ship bound for the blockaded Gaza Strip, killing 10 Turkish nationals, have been damaged as Turkey took a harsh position against Israel’s attacks in Gaza. Consequently, diplomacy-based cooperation on the eastern Mediterranean gas operations and exports between Israel and Turkey, which also involve Egypt, Greece, Cyprus and even Lebanon, may also be impacted by the war. Additionally, Israel will continue to take a dim view of renewing the international nuclear deals with Iran. The future of existing agreements and the conclusion of others will depend on the policies of a future Israeli government. In January 2023, the right-wing coalition government proposed a judicial reform that, in its preliminary stage, would have thwarted the Supreme Court’s ability to veto government actions and appointments by limiting the Court’s use of the “reasonableness” doctrine, thereby widening the gap between secularists and religious nationalists whose support of the government has been needed by Prime Minister Netanyahu to retain its majority. Mass demonstrations took place only to cease when the war started. The Supreme Court overturned the judicial reform in January 2024. Sometime in 2024, the national emergency coalition government and the war cabinet formed by Prime Minister Netanyahu, including centrist Gantz and defence minister Yoav Gallant to ensure national consensus for military actions against Hamas, will dissolve with the end of hostilities. The far-right dependent government is then expected to collapse due to its failure to prevent Hamas’ attacks and its judicial reform that sparked nationwide dissension. The action of several ministers, including the Prime Minister’s, as well as that of other senior officials, will certainly be investigated for their responsibility in the disaster.

Last updated: January 2024

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