Fighting back against Covid, the country has a better risk score than a year ago, making it the safest for investors in the Middle East.
The Israeli economy bounced back vociferously, as expected, in the third quarter of this year, with real GDP growing by a seasonally adjusted annualized pace of 37.9% on the back of recovering domestic and external demand, according to the preliminary release this week from the Central Bureau of Statistics.
This unusually spectacular performance reflects the easing of the first lockdown and the fact that the second began only in the final two weeks of the quarter.
Hence, it would be wise to remain cautious, given that real GDP also contracted by 1.4% year on year; consumer spending and investment indicators were down sharply in comparison with a year earlier.
Moreover, economists and other experts taking part in Euromoney’s risk survey downgraded Israel’s total risk score in the third quarter.
As in other countries, Israel has been struggling to contain Covid-19, with more than 362,000 officially recorded cases and a death toll now exceeding 2,700 in a population of 9.25 million.
The failure to pass the budget, causing instability within the governing coalition, and the exaggerated fiscal deficit – pumping up the debt burden to a predicted 80% of GDP by next year – are not a recipe for investor confidence.
Yet so far, the country has held up in Euromoney’s global risk rankings, climbing to 24th out of 174 countries, making Israel a similar risk to Chile and Luxembourg.
Its total risk score of 68.62 is not only the best in the Middle East, ahead of Qatar (30th) on 64.64, but is also higher on year-to-date, year-on-year and five-year trend bases.
The only conclusion is that Israel is becoming safer over time; the question is how?
The economy is part of the puzzle.
The unemployment rate is uncomfortably high, but survey contributor Gil Bufman of Bank Leumi presents Euromoney with a chart showing that Israel’s GDP has not contracted as severely this year as it has in the US, the UK or the euro zone, so comparatively it is faring better.
“Israel's current GDP level is only 2.6% below its level back in the fourth quarter of 2019, prior to the outbreak of the coronavirus crisis,” he says, quoting Bank Leumi’s latest weekly report produced by his colleagues, Yaniv Bar and Gili Ben-Abraham.
“This rate is low compared to most of the developed countries of the world. That is to say, the cumulative damage of the coronavirus crisis felt by the Israeli economy in the first three quarters of 2020 was moderate compared to other countries, some of which experienced a longer period of complete economic shutdown than that which occurred in Israel, for example, France, Spain and others.”
Bank Leumi is now expecting a year average decline of 3.4% in 2020, which is better than the 5.5% drop previously expected, noting in particular the welcome increase registered in exports of diamonds and industrial goods.
Israel is also forecast to back next year, too, with real GDP growing by 5% to 6%, and the confidence in this prediction is no doubt underpinned by the recent news flow on global vaccine development.
However, Israel’s low risks go deeper than its macroeconomic statistics.
One area of particular interest is its structural indicator improvements, with higher scores for demographics, infrastructure and labour relations.
One contributor mentioned privately that Israel has the highest fertility rate within the OECD, providing a pool of young workers to boost economic growth potential and ease any demographic shock.
The government is also investing heavily in infrastructure projects to alleviate transport system bottlenecks, including plans to build a new airport. It has a thriving tech sector and possesses offshore natural gas reserves.
Bank stability scores highly, while another positive is Israel’s capital access receiving a higher score this year, demonstrating the ease of raising finance on the international markets.
This is understandable, not least because the country runs a solid current account surplus, has a predictable policymaking framework underpinned by strong central bank credibility, and a high score – indeed, the highest in the region – for government payments/capital repatriation.
Israel’s improving relations with Bahrain, Sudan and the United Arab Emirates have also undoubtedly helped its overall country risk, thanks to increased regional cooperation, transport links and trade ties.
The landmark peace deals brokered by the administration of outgoing president Donald Trump have given birth to a $3 billion development fund to engage the private sector in improving agricultural productivity, energy and water security, and regional infrastructure.
Already it has been announced that the trans-Israel oil pipeline linking two oil ports, one in Eilat on the Red Sea and the other in Ashkelon on the Mediterranean Sea, will be extended to the UAE. That will create the most cost-effective route for transporting oil from the Gulf to Europe.
With Iran a common enemy, other Arab states might follow suit – and for investors seeking out lower-risk options, Euromoney’s survey demonstrates Israel’s potential for ‘milk and honey’.