Executive Summary.. 5
Core Views...5
Major Forecast Changes.....5
Key Risks To Outlook.....5
Chapter 1: Political Outlook. 7
BMI Political Risk Ratings..... 7
Domestic Political Outlook.... 8
Swap Deal Shows Peace Is Still Far Off....8
The agreement between Israel and Hamas to swap prisoners will do little to promote the peace process between Israelis and
Palestinians. From Israels perspective, we foresee an uptick in security risks, continuing stability within the coalition government, and
the need to reassess its military strategies. From the Palestinian perspective, Hamas will benefit greatly at the expense of Fatah.
TABLE: Political Overview.. 8
Will Long-Lasting Peace Be Achieved?..10
Over the next decade, Israel will continue to face external security threats from militant groups Hamas and Iran-backed Hizbullah.
Downside risks to stability stem from the potential for renewed conflict with Hizbullah across Israels northern border, although a peace
settlement with the Palestinian Authority poses upside risks.
Chapter 2: Economic Outlook.... 15
BMI Economic Risk Ratings.... 15
Economic Activity ... 16
Growth Outlook Less Bright....16
Israels economy is set to decelerate further going forward, as we now project private consumption and exports to expand at an
even slower pace than before. Private consumption and fixed investment will drive the economy over the medium term, and we have
pencilled in real GDP growth of 3.4% and 3.8% y-o-y in 2012 and 2013 respectively, down from previous forecasts of 4.3% and 4.7%.
TABLE: ECONOMIC ACTIVITY.. 16
Fiscal Policy..... 18
Fiscal Consolidation Plans To Unravel...18
The Israeli cabinets decision to approve a set of reform recommendations related to taxes will have a major impact on the countrys
fiscal accounts, and we have revised up our deficit forecasts to 2.8% and 2.6% of GDP in 2012 and 2013, from 1.4% and 0.5%
previously. While increases in tax revenues will provide somewhat of a cushion, they will not be enough to make up the shortfall left by
cuts to customs and duties.
TABLE: FISCAL POLICY.... 18
Monetary Policy ... 19
Dovish Monetary Policy Ahead....19
Israeli monetary policy will become more dovish going forward, as concerns over the countrys economic momentum and global growth
rise alongside the ongoing eurozone sovereign debt crisis. Easing inflationary pressures will allow the central bank a greater degree of
flexibility in supporting growth, and we have revised down our end-2012 and end-2013 headline interest rate forecasts to 2.25% and
2.50% respectively, from 2.75% and 4.00% previously.
Balance Of Payments ..... 21
Current Account Surpluses To Decline..21
Israels current account surplus will diminish over the coming years as external demand remains weak while import needs remain
strong, and we project balances of 1.5% and 1.4% of GDP in 2012 and 2013. Financial account inflows are also set to decline on the
back of reduced carry trade opportunities and an elevated political risk profile.
TABLE: CURRENT ACCOUNT ... 22
Banking Sector..... 23
Asset Growth To Decelerate....23
Israels banking sector faces intensifying challenges ahead, and we expect total asset growth to decelerate to 5.0% in 2012 and 2013
respectively, from a projected growth rate of 6.5% in 2011. Deposit inflows will decelerate and raising equity capital will become more
difficult. Furthermore, banks asset allocation decisions will become more challenging in a climate of growing provisions for bad loans
and volatile capital markets.
TABLE: BAN KIN G SECTOR OVER VIEW .. 24
Chapter 3: 10-Year Forecast.. 25
The Israeli Economy To 2020.. 25
Long-Term Outlook Slow But Steady .....25
We are forecasting steady, if unspectacular, growth We are forecasting steady, if unspectacular, growth for the increasingly developed
Israeli economy over the long term. As ever, political risks pose downside risks to our GDP growth forecasts.
Chapter 4: Business Environment. 27
BMI Business Environment Risk Ratings.. 27
Business Environment Outlook.. 28
Institutions.... 28
TABLE: BMI Business And Operation Risk Ratings... 28
TABLE: BMI Legal Framework Rating... 29
Infrastructure.... 30
Market Orientation ... 31
TABLE: Labour Force Quality..... 31
TABLE: Middl e East and Africa – Annual FDI Inflows.... 32
TABLE: TOP EXPORT DESTINATIONS .... 33
TABLE: Trade And Investment Ratings..... 33
Chapter 5: Key Sectors... 35
Oil & Gas .. 35
TABLE: Israel Oil And Gas – Historical Data And Forecasts.... 38
Infrastructure ... 40
TABLE: Israel Transport Infrastructure Industry Data.. 42
Chapter 6: BMI Global Assumptions. 45
Global Assumptions.... 45
Eurozone Break-Up Risks Rising ...45
TABLE: GLOBAL ASSUMPTIONS ..... 45
TABLE: DEVELOPE D STATES REAL GDP GROWT H FORECAST .... 46
TABLE: REAL GDP GROWT H CONSENSUS FORECASTS .... 46
TABLE: EMERGING MARKETS REAL GDP GROWT H FORECAST ... 47