Israel had escaped much of the financial wobbles that stirred world markets, but the emerging market economy would not be immune in the long run, analysts said.
Israel's ability to ward off global financial ripples depends on its strategy to sustain growth and preserve financial stability, they said, noting that the year 2009 would be especially challenging.
RESILIENT ECONOMY TO CUSHION REPERCUSSIONS
"It is not so clear to what extent the Israeli economy will be affected," Ami Rosenberg, head of economic research at Gaon Investment House, told Xinhua.
"Israel's connection to the subprime mortgage crisis is secondary as there was little investment in subprime products, so we are mostly affected indirectly by the crisis in the U.S. housing sector due to the negative impact of the macroeconomic situation internationally," he said.
Some analysts believe that Israel's economy has so far managed to absorb shocks from the raging international credit crunch due to its strong macroeconomic fundamentals and a stable banking system.
Israel had a balanced budget in 2007 and the central bank expects a mild budget deficit in 2008, which accounts for 1.6 percent of the gross domestic product (GDP).
The debt to GDP ratio has dropped from well over 100 percent to around 80 percent, thanks to prudent fiscal policies since 2003.
In addition, analysts expected the balance of payments, which has been in surplus, to offset pressure from the forecast budget deficit. The balance of payments surplus was 6 percent of GDP in 2006 and 3 percent in 2007.
Israel's currency shekel has been relatively solid against major currencies over the past two years, analysts said. To avoid a currency collapse seen in other countries, Israel's central bank has been building up its foreign currency reserves by buying 100 million U.S. dollars a day since March.
LOW EXPOSURE TO TOXIC ASSETS
Israel's banking system remains nearly insulated with the toxic assets. Only one Israeli bank has considerable exposure to the subprime mortgage backed securities and credit default swaps (CDS),and it has managed to contain the overspill.
"We won't see the erasure of real assets, like with collateralized debt obligations (CDO) and CDS in the United States," Rosenberg said.
The local real estate market was barely affected as Israeli banks only offer up to around 70 percent of mortgage finance, compared with up to 100 percent in the United States, and there was no housing sector boom in the Jewish country.
Rosenberg, however, said that Israel is likely to see an increase in unemployment, a drop in growth, and lower shekel interest rates at the central bank.
To cushion the Israeli economy, the government is set to publish a plan of investment in the country's financial infrastructure to help increase liquidity in the market.
"For many companies, it is hard to get credit, and the government will want to facilitate that by lowering lending rates," Rosenberg said.
Though macroeconomic fundamentals remain strong, analysts noted that the coming year would be challenging.
The Bank of Israel, the country's central bank, expects economic growth in 2008 to slow down to 4.5 percent from a staggering 5.3 percent in 2007. In September, it updated its official estimate for economic growth in 2009 to 2.7 percent.
Rosenberg said a further cut is probable, noting that "The Bank of Israel is likely to lower its forecast for economic growth in 2009 to between 1.8 to 2.2 percent."
RECESSION LOOMS
There could be a significant drop in growth and there is a chance the economy might fall into a recession, which is defined as two consecutive quarters of negative growth, he said.
"The new forecast would be close to nil growth on a per capita basis," Vered Dar, chief economist at Psagot Ofek Investment House, told Xinhua.
"Anything less than 1.7 percent in Israel would mean zero growth," she said, noting it would be okay for the European Union and the United States as their populations grow much slower.
"A 1.7 percent growth rate in Israel would be equal to zero percent per capita as the country's population growth is very high," she explained.
Analysts also said the Israeli economy would be directly hit by the decline of exports, the shrink of Israeli household wealth and the ensuing consumption crunch.
"The problem is that when you have an economy based on exports, and 45 percent of Israel's GDP is exports, and a worldwide economic recession, it is not possible for that export-based economy not to get into a recession or at the very least a very severe economic slowdown," Dar said.
"Not (only) because of subprime, but because all of our clients are in a recession."
"So far Israel has not been that much impacted, but Israel will be very close to a recession. It simply took us time to get to this point," Dar said, noting that the United States would probably declare soon that it has been in a recession since the fourth quarter of 2007.
"Unlike the recession we had between 2001 and 2003, this is a worldwide slowdown, and it isn't a domestic problem," Dar said, referring to the second Palestinian Intifada (uprising) and a slew of policy mistakes that were to blame for the economic slowdown.
"We can have the best policy in the world but that will only help you so much. The problem is not ours, we just need to make as few mistakes as possible and then maybe we will be out of it," she said.
Source:Xinhua
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