Country risk: Israel’s lead in the vaccine race ‘is no silver bullet’

People queue for the Covid-19 vaccine at a mobile vaccination vehicle in Jerusalem

If there is any surprise to be had from the Covid-19 vaccination programme, it is that Israel has gained such a march on its rivals.

The latest figures show that, as of early March, the country had given a single vaccination to almost five million of its nine million strong population, with 3.7 million receiving the recommended double-dose.

Consequently, the government has relaxed restrictions by opening bars, cafés and restaurants to 'green pass' holders – those citizens who have been fully inoculated or recovered from the disease.

Indoor dining is permitted, albeit with some social distancing still required, and those without passes are able to consume food and drink outside.

With gyms, swimming pools, sports events and other facilities open, the economy and society are gradually return to normal.

Israel’s success is outstanding.

It only began vaccinating in December, and it highlights Israeli expertise and political prerogatives.

It also follows a year in which the decline in GDP was among the smallest of any OECD country, despite the high number of days with economic activity under restrictions.

The economic downturn led to economic risk deteriorating, but easier capital access and across-the-board political risk upgrades catapulted the country above the US into the top-20 least riskiest countries in Euromoney’s global risk rankings:

Israeli analysts are not shy when it comes to extolling their country’s virtues, yet it seems highly justified given what are ostensibly first-class operational abilities underpinned by an effective army-style management process extending into the healthcare system.

The administrative machine was pushed into overdrive, purchasing substantial quantities of vaccine supplies in return for sharing population health data from an efficient online healthcare system.

Temporary vaccination centres, such as cinemas and stadiums, were rapidly requisitioned, and vaccines were even taken out to some more remote places and to infirm recipients.

Clearly, there has been a political element, too.

Prime minister Benjamin Netanyahu is facing repeat elections on March 23 after the failure of the Knesset to approve the 2020 state budget by the December deadline, and he has taken full control to ensure the vaccine programme’s success.

The country’s twice-serving septuagenarian leader – his latest spell now lasting almost 12 years – should see in another victory for his right-leaning and secular Likud (National Liberal Movement) party.

However, he also faces the prospect of being replaced by the right-wing Yamina chair Naftali Bennett, propped-up by an anti-Netanyahu bloc, given the prospect of another close outcome and the requirement to form a coalition against the backdrop of corruption allegations still hanging over the prime minister.

The political climate is not a comfortable one for most of Euromoney’s analysts, but it is no worse than before the pandemic struck and, besides, the economic outlook is improved with growth prospects exceeding many European countries.

Israel has a current-account surplus, supporting the shekel along with solid inflows of foreign direct investment. There are no notable inflation fears and with the central bank purchasing foreign exchange to limit currency appreciation, there is a solid pile of FX reserves.

There is also hope for a return to normality for the tourism sector supporting economic growth, which the ministry of finance is predicting will reach 4.9% this year while remaining above 4% in 2022.

Under these assumptions, the fiscal deficit would narrow, initially to 8.8% of GDP in 2021, pushing the debt burden up to 77% of GDP, but enabling it to stabilize at just below 80% of GDP.

There are, nevertheless, some conservative voices such as ECR survey expert Gil Bufman of Bank Leumi, who argues the vaccine is not a “silver bullet” and that the 5% real GDP growth his bank is forecasting for this year incorporates “ongoing constraints and possible pull-backs later on in 2021”.

While noting that youths under the age of 16 are not being vaccinated yet, and there is some hesitancy among young adults, Bufman says: “There are questions regarding the efficacy of the vaccine against virus mutations and the risk of people that have recovered from the virus to be reinfected again by various mutations.”

Other Israeli contributors, who wished not to be named, endorsed this view, noting that all the efforts Israel has made might be frustrated by the emergence of a strong mutation.

A weaker-than-projected economic recovery would have implications for the debt burden. It would be higher than projected as plans to get the deficit down to a more normal 3% of GDP level are frustrated.

There will be also an increase in “structural” unemployment relative to the pre-coronavirus situation, according to Bufman, who says it reflects, among other things, “a situation in which certain occupations will not be in such high demand as they were before the crisis”.

He adds: “The greater difficulty will be felt among those who have a profession no longer in demand and for which no suitable framework will be found for professional transition into a required profession.”