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Israeli Economy Strong But Challenged, Analysts Say

Israeli Economy Strong But Challenged, Analysts Say

Israel probably entered the pandemic in better shape than some Western European economies, professor says

Israel’s biggest banks’ third-quarter performance showed that the country’s economy is doing fairly well considering the COVID-19 lockdowns and other related measures, an economic analyst said.

Bank Leumi and Bank Hapoalim had been forced to build up reserves for credit losses because some clients were not able to repay loans. Bank Leumi reported net income of NIS 750 million, down 2% from the NIS 765 million it brought in during the same period last year. Bank Hapoalim’s net income rose 11% to NIS 816 million from NIS 736 million in the third quarter of 2019.

The banks are “the fuel that keeps the economy going,” economic and financial analyst Pinchas Landau told The Media Line. Israel has probably seen the worst of the economic damage, he said. “2020’s second quarter was the worst, with the third quarter showing a strong recovery. However, this last quarter of 2020 will be down again.”

The Bank of Israel figures show that the economy contracted 28.8% during the second quarter – April, May and June. The central bank estimates that there will be a negative growth rate of 4.5% to 5% this year.

Landau said this means that “the economy is in decent shape.”

“Sure, we have political, social and fiscal problems, with unemployment being a major social problem, but we are dealing with a force majeure situation, and there is really very little that can be done.”

The Bank of Israel estimated that by year’s end, the unemployment rate might reach 17% to 20%. A Central Bureau of Statistics survey for the first half of October when Israel was in lockdown, showed that the “broad” rate of unemployment was 22.7%, meaning 937,500 people. That rate includes those over age 15, people on unpaid leave and those who have lost jobs since March and no longer seek work.

The government is also running a large deficit of 12% of Gross Domestic Product (GDP) by borrowing abroad, Landau said. “But the Treasury is doing this sensibly,” because it is financing the national budget during a pandemic.

Associate Economics Professor Naomi Feldman of the Hebrew University of Jerusalem concurred.

“Israel has strong fundamentals,” she told The Media Line. “We are probably in a slighter better situation than many others in the developed world, say for instance Italy and Spain.”

That is because “Israel started off at a good point. Over the past years, we reduced our debt-to-GDP ratio to about 60%. Of course, now, we are borrowing, and it is now closer, or even above, 80%.”

“Israel was quite fiscally responsible leading up to the coronavirus pandemic,” she said.

The world’s two leading credit-rating agencies agreed.

Late last week, Standard & Poor’s (S&P) maintained Israel’s relatively high AA- classification. AA is the second-best S&P rating. The agency noted the country’s robust financial system, flexible monetary policy, relatively strong pool of local savings, access to capital markets and access to domestic and international capital markets.

Moody’s kept Israel at its A1 rating last month, which is investment grade.

“The sovereign ratings determine at what rate of interest the country can borrow funds from abroad,” Landau said, adding that politicians make too much out of this.

Following the S&P evaluation, Finance Minister Israel Katz said: “The decision by S&P to keep the State of Israel’s credit rating at AA-, with a stable outlook, is a great expression of trust in Israel’s economy and a mark of praise for the State of Israel.”

Prime Minister Binyamin Netanyahu noted that S&P had lowered its sovereign credit ratings for other industrialized countries during the pandemic.

This does not mean that Israel is free of economic problems. The country still does not have a budget, which means that it operates on the same amount as the previous year. Factions in the governing coalition are dueling about whether and how to pass a 2021 budget instead of a two-year budget. If there is no budget, the government may fall, triggering elections.

Due to “political gridlock,” as Feldman calls it, there have been three rounds of elections in a year during which budgets were not passed, so the country is still running on the 2019 budget.

“This is wrong and worrying,” Landau said. “There will be a struggle for the 2021 budget whereas we are less than six weeks from the end of 2020, for which there was no budget.”

“We will have a fiscal problem without a budget. If the ongoing political crisis continues, we will have massive overspending and growing deficits. By mid-2021 it is not implausible that the country has a real chance of an international-loan ratings downgrade.”

“The budget is very important for certainty,” said Feldman, who talks with people in the prime minister’s office fairly regularly and who participated in a roundtable economic policy discussion with the prime minister in July.

“There is nothing positive about no budget. Political problems are hindering policy. I understand the political maneuvering, but they have to compromise and make it happen.”

In addition, the pandemic is a major drag on the economy.

“No one knows when this situation will end,” says Feldman, “but what I do know is that we need to begin dealing with the long term. Austerity measures don’t work, so we will need to spread out our debt payments for longer periods, such as 10 or 20 years.”

Israel’s next generation may still be paying for today’s coronavirus debts.

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