Lehman Brothers recently published a bullish report on Israel's economy, noting that it is one of the strongest economies among emerging markets, and calling Israel's fundamentals "very supportive". Lehman analysts Silja Sepping and Tolga Ediz view Israel as an economy that can persevere and prosper as the effects of the credit crisis reach emerging markets.
Lehman claims that Israel's external trade is currently among the strongest in emerging market economies, even if strong domestic demand eventually tips the balance, noting "Israel’s balance of payments picture, with foreign direct investment and the current account combining for a surplus of close to 7% of GDP, is easily the strongest in the EMEA region and in emerging markets as a whole. And Israel’s current account surplus of close to 4% of GDP is especially notable considering that Israel is a net commodity importer. And, on our own measure of external vulnerability Damocles Israel has the lowest possible score: zero1. Although the current account surplus has passed its peak and will likely continue to fall as the trade balance moves further into red on the back of buoyant domestic demand, the balance is still likely to remain very healthy for now."
The investment bank adds that "the economy looks to be in a safer position from the capital flow perspective now, especially compared to the 1990s. In contrast to the past decade, portfolio inflows no longer drive the capital account. In fact, quite the opposite is true: portfolio outflows have picked up significantly in the past three years as Israeli fund managers have taken advantage of the liberalization of regulations to increase their holdings abroad."
Lehman also likes the fact that Israel's strong domestic demand can carry the economy even if its global trading partners begin to falter. This has been a source of worry to economists in Israel and abroad - who see a potential US recession as a drag on Israel's economy. However, Lehman points out that "Although growth is likely to slow this year, to around 4%, as a result of tighter domestic monetary policy, the overall outlook is robust and not dependent on external developments. Israel has never enjoyed such high and stable growth rates as it has in the past four years, with annual GDP growth steadily above 5%. What is more and especially significant in the current environment growth has been driven by domestic rather than external demand, reducing Israel’s vulnerability to the global growth outlook. Although Israel’s close economic links to the US are often mentioned as the key risk for the economy and the currency, the economy is a lot more diversified now, unlike when the dotcom bubble burst in early 2000. Furthermore, given the structure of Israeli exports, the export sector is most affected by the US and European corporate fixed investment demand rather than the consumer sector and while our global economics team expects some slowing, we do not forecast a collapse."
Published by Globes [online], Israel business news - www.globes-online.com - on January 31, 2008
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