Our comprehensive assessment of Israel's operating environment and the outlook for its leading sectors are formed by bringing together a wealth of data on global markets that affect Israel, as well as the latest industry developments that could impact Israel's industries. This unique integrated approach has given us an impeccable track-record for predicting important shifts in the markets, ensuring you’re aware of the latest market opportunities and risks in Israel before your competitors.

Country Risk

Israel Country Risk

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Core Views

  • Political risks remain elevated despite truce between Israel and Islamist group Hamas in 2014, as highlighted by protracted violence since the ceasefire. Prime Minister Benjamin Netanyahu controls a coalition with a majority of just one seat in the Knesset and it is likely that it will not be able to see out its four year term. The economy will experience a modest pickup in growth over the coming quarters, driven mainly by private consumption.

Major Forecast Changes

  • We have revised our interest rate outlook to the downside, given that inflation will likely reach just 1% by the end of 2015. As a result, the Bank of Israel will maintain its policy rate at 0.10% until the end of 2015, and gradually hike it in 2016 to reach 0.50% by the end of the year.

Key...

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Israel Operational Risk Coverage (9)

Israel Operational Risk

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BMI View: The major security threats posed to businesses and workers in Israel stem from the risk of terrorism and interstate conflict, both of which are high on a global scale. Israel is surrounded by hostile states, most of which it has been at war with in the recent past. Although the risk of interstate conflict is lower since diplomatic relations were established with Egypt and Jordan, Israel maintains a hostile stance towards Lebanon, Syria and Iran. In return, these countries have sponsored the militant wing of the Palestinian political group Hamas. The most recent flare up of the conflict between Israel and Hamas occurred in July 2014, highlighting the continuing operational risks to businesses in Israel from terrorist activity. In contrast, crime is not a serious threat to the safety of foreign workers and business assets. Overall, Israel scores poorly in the BMI Crime and Security Risk Index, with...

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Israel Crime & Security

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Israel scores 41.5 overall in the BMI Crime and Security Risk Index. Although, Israel outperforms in the Criminal Risks rating component, the risk posed by interstate and terrorist threats are high, as the country is surrounded by, or in close proximity to historically hostile states that have backed terrorist groups in Israel.

Violent crime is a problem in Israel, as it incurs the highest assault rates in the region and one of the highest rates for sexual offences. However, the murder rate is quite low in Israel compared to other types of crime.

Organised crime and associated gangland violence are becoming major issues for the police force and gangs are active in drug trafficking, due to the rise in demand for illicit substances. Gangs are currently engaged in a turf war in many parts of the country and car bombs and gunfire in public spaces are becoming increasingly common.

Kidnappings are...

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Israel Labour Market

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Israel boasts a large and well educated population of working age, which is underlined by its regional outperformance in our Labour Market Risks Index. This is encouraging for investors as it means a high quality domestic supply of labour is readily available. However, high wage and severance costs, extensive employee entitlements and a complex regulatory environment serve to increase the overall costs for investors and impede the flexibility of the workforce. That said, Israel scores 69.4 out of 100 in our Labour Market Risks Index, surpassing all its regional counterparts and placing 17 th out of 170 countries.

Israel benefits from a sizeable and well educated labour force which is highlighted in its regional outperforming score of 75.5 out of 100 for Availability of Labour. The score is boosted by a high life expectancy of 82 years and an impressive population growth rate of 1.9% to 8.1mn people in 2013. In addition, the...

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Israel Logistics

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Israel's supply chain benefits from a well developed and connected transport network, timely trade procedures and governance, and a strong growth look. The key risks to the network involve an overreliance on road transport and the underdeveloped port sector. An increase in road traffic is forecast for the medium term which will put extra pressure on the transport network, thereby increasing congestion and possibly reducing quality if investment is not increased. This could negatively impact the logistics sector as it increases costs and transport time. Israel outperforms almost all of its 18 regional neighbours in the BMI Logistics Risks Index. A score of 63.9 out of 100 places it behind United Arab Emirates only.

Israel's rail network offers good links between most urban areas and airports and ports, benefitting the connectivity of the country's logistics sector. A growth in rail freight and investment is boosting the...

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Israel Trade & Investment

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Israel faces some major trade and investment risks for investors despite the organisation of its market economy and open attitude to foreign investment. The major risks to trade are posed by relatively high tax rates and timely bureaucratic procedures. However, the government offers attractive financial incentives in certain industries. In addition, stable institutions and low levels of corruption act to partially mitigate these risks. Israel's average performance is underlined by its score of 58.4 out of 100 overall in the Trade and Investment Risk Index, placing it just inside the top five regionally after the UAE, Qatar, Bahrain and Oman, and 54th out of 170 countries worldwide.

Israel is a relatively open country for economic activity due to its market-oriented economy and generous government incentives for foreign investment. Israel scores 55.6 out of 100 for Economic Openness, placing it sixth in the region. Israel is a particularly...

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Israel Industry Coverage (18)

Autos

Israel Autos

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Although BMI had been concerned that the conflict in Gaza during Q314 would undermine new vehicle sales in Israel - which were down by 12.1% year-on-year (y-o-y) in the month of July - there was no lasting effect. So, based on current buoyant sales trends, BMI is targeting full-year total new vehicle sales of around 260,000 units, representing annual growth of around 16%.

BMI believes that there will be a slowdown in new vehicle sales growth in 2015. We are targeting growth of 4.5% in passenger car sales, with slightly stronger growth of 7% for the commercial vehicle sector. Passenger car sales could well be undermined by higher taxes and still-depressed consumer confidence. That said, passenger cars will continue to account for the lion's share (77%) of total new vehicle sales in 2015. Over the full forecast period to 2018, we are targeting 24% growth in the...

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Commercial Banking

Israel Commercial Banking

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...
Commercial Banking Sector Indicators
Date Total assets Client loans Bond portfolio Other Liabilities and capital Capital Client deposits

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Consumer Electronics

Israel Consumer Electronics

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Israel's consumer electronics market is one of the most mature in the Middle East and Africa, supported by its vibrant high-tech start-up community, its position as an R&D hub for global devices and IT vendors, and high spending on IT solutions within the government and defence sectors. Although penetration of mobile, AV and computer devices is already high, these factors keep the replacement rate elevated, while the launch of full scale LTE networks will give an additional boost to smartphone sales in 2015. The main risk to the Israeli market stems from currency volatility during 2012-2015, which has resulted in a slight downtown in our US dollar sales forecast for 2015. However, we expect this to stabilise, allowing the market to return to modest growth during the latter years of our forecast period to 2019.

...

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Defence & Security

Israel Defence & Security

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BMI View:  Israel's domestic and regional security situation remains volatile. BMI thinks that the ceasefire between Israel and Hamas is a short-term solution for temporary peace. However, we expect a likely resumption of hostilities in the not too distant future. We are currently most concerned about the rising tensions across the West Bank. We also expect the number of Christian draftees into the army to increase without notable impact to the size of the army.

This quarter, BMI explains how divisions exist and divisions are being created by the Israeli government in relation to compulsory military...

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Food & Drink

Israel Food & Drink

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In May 2010, parliament passed the new Law on Medicinal Products and Medical Devices, which is based on EU legislation. The law was published in the Official Gazette of the Republic of Serbia on May 7 2010. Part IV of the law details the rules that govern medical devices. The following areas are covered:

  • Classification;

  • Registration, including variations, renewals and cancellations;

  • Conditions and licensing in relation to medical device manufacturing;

  • Marketing;

  • Wholesale;

  • Importation;

  • Retail;

  • Clinical trials;

  • Labelling;

  • Quality Standards and Quality Control Methods;

  • Vigilance; and

    ...

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Freight Transport

Israel Freight Transport

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BMI View: Growth on Israel's freight transport network will be positive in 2015. This is an improvement on recent years, when the sector has seen declining volumes on air planes and at the country's major ports, thanks to sluggish economic growth - both domestically and in major trade partner Europe - and political instability on its borders with other states, and with Gaza. Nevertheless, this growth will be sluggish in some sectors, thanks in part to their developed nature, and the fact that they are geared almost exclusively towards domestic demand. The outperformer will be rail freight, where investment in the sector's infrastructure and rolling stock will ensure strong growth over the coming years.

Israel's trade will experience positive real growth over the coming years, despite an expected...

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Information Technology

Israel Information Technology

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BMI View: Israel's vibrant ICT start-up community and highly skilled tech workers have continued to attract high levels of investment in 2015, following a record breaking year in 2014. We expect this trend to continue, as global IT firms look to leverage innovative solutions emerging from Israel's start-up ecosystem to accelerate their transition towards high-growth software and services such as cloud computing and big data analytics.

Nevertheless, because of the comparatively high penetration of IT products and services, as well as its small population, Israel's IT market is expected to grow more slowly than most others in the region. Given its geopolitical location and the uptick in violence...

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Infrastructure

Israel Infrastructure

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BMI View: We currently forecast 2.6% real growth in Israel's construction industry in 2015, following an estimated contraction of 0.4% in 2014. Our forecast is supported by low base effects and a recovery in gross fixed capital formation (GFCF). We maintain our medium-to-long term favourable view of Israel's construction market and we forecast an average growth rate of 2.3% between 2016 and 2024.

Key developments in Israel's infrastructure sector:

  • Our Country Risk team expects growth in gross fixed capital formation (GFCF) to accelerate by 3.1% in 2015 as result of low base effects following a sharp decline in 2014, estimated at -1.5%. In terms of GDP real growth, our Country Risk team forecasts a more solid 3.1% in 2015, from 1.6% in 2014.

  • Israel's infrastructure project pipeline...

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Insurance

Israel Insurance

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BMI View: Israel's insurance market is one of the most well developed in the region, with a high density (premiums per capita) and solid growth indicating a positive outlook for the industry moving forward. Currency fluctuations do mean that over the short term we expect to see a decline in both life and non-life premiums in US dollar terms, though in local currency terms both sectors will continue to record steady single digit growth throughout the forecast period through to 2019.

We hold a bullish view for the Israeli insurance market as a whole, largely due to the rising wealth in the Israeli market. We expect to see a steady rate of growth throughout the forecast period to 2019 with higher demand for life insurance ensuring demand for premiums remains strong. The strong growth of the overall economy will see life insurance penetration...

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Medical Devices

Israel Medical Devices

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BMI Industry View: One of the most attractive markets for multinationals in the region, Israel's medical device market is valued at USD1,077.4mn in 2013, equal to USD139 per capita. Strong trade relations with the USA facilitate medical device imports and exports, while Israel is also a very dynamic market in terms of medical device start-ups. The market is expected to expand at a CAGR of 9.5% during the forecast period, which should see it reach USD1,692.8mn, or USD205 per capita, by...

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Oil & Gas

Israel Oil & Gas

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BMI View: The positive investment environment that drove the record development of the Tamar field has been severely damaged with the Antitrust Authority's move to improve break up the Noble, Delek monopoly in the offshore segment. Development of the Leviathan field will be delayed, postponing gas consumption growth and export opportunities.

...
Headline Forecasts (Israel 2013-2019)
2013 2014e 2015f

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Petrochemicals

Israel Petrochemicals

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BMI View: While the petrochemicals sector performed slightly better in 2014 than estimated in the previous quarter, rubber, plastics and chemicals output saw plenty of downside in the final months of the year and going into 2015. However, stronger domestic economic performance coupled with low feedstock costs should support output growth over the short-term, according to BMI 's latest Israel Petrochemicals Report.

In 2014, Israeli rubber and plastic production grew just 0.8% year-on-year (y-o-y) while petroleum and chemical products output declined 1.1% over the period. With the economy due to post solid growth over the next two years and industry likely to see above-trend growth, prospects look good for the industry. Much will depend on the price of naphtha with Israeli production managing to hold up margins in spite...

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Pharmaceuticals & Healthcare

Israel Pharmaceuticals & Healthcare

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BMI View: Drug price cuts and the addition of new pharmaceuticals to the national drug formulary demonstrate the government's commitment to expanding access to healthcare. Healthcare spending will remain elevated despite the fiscal deficit given the sector's importance in social stability.

Headline Expenditure Projections

  • Pharmaceuticals: ILS7.51bn (USD2.10bn) in 2014 to ILS7.82bn (USD2.01bn) in 2015; +4.2% in local currency terms and -4.4% in US dollar terms.

  • Healthcare: ILS80.67bn (USD22.55bn) in 2014 to ILS85.80bn (USD22.00bn) in 2015; +6.4% in local currency terms and -2.4% in US dollar terms.

Risk/Reward Index

...

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Real Estate

Israel Real Estate

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BMI View:  The Israeli retail market is weathering the effects of the conflict in Gaza well. Although conflict is sure to have a dampening effect on the economy, BMI forecasts strong growth in Israel for 2015, and the drivers underlying the real estate market, such as Israel's world class technology industry and relatively robust institutions, remain strong.

Israel is a location where people are accustomed to risk and the effects of political conflict and violence. Clashes that are within the range of what has come to be 'normal', although they may dampen economic activity in the short run, are unlikely to derail economic growth in the medium term. As such BMI sees Israeli economic growth accelerating over the next several years, increasing each year after 2014's weak 2.5% growth to peak around 4.4% growth in 2019.

For...

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Retail

Israel Retail

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BMI View: Despite some economic improvements since 2014's conflict, Israel's economy grew at a disappointing annual rate of 2.5% in the first quarter with the number of new investments falling and sluggish levels of government spending. As a result, we expect to see a fall in consumer confidence, with a drop in household spending expected (in USD currency terms). Beyond 2015 we believe there will exist some ongoing potential within Israel's retail market owing to the country's increasingly affluent population however we warn that growing income inequality will weigh on potential growth in spending on retail non essentials.

While Israel...

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Shipping

Israel Shipping

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BMI View: We expect moderate growth across Israel's ports in 2015, which will benefit from the base effects of a rebound in economic growth following disruption caused by the Operation Protective Edge conflict in 2014. The port of Haifa will return to growth following two years of decline in its container throughput. The Israeli ports sector is undergoing a state of flux, with the major ports set to be expanded with new, privately operated, terminals, which will be able to handle the larger vessels that are becoming the norm on the key Asia-Europe trade route on which Israel stands. However, these developments face strong opposition from current port workers and...

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Telecommunications

Israel Telecommunications

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BMI Industry View

BMI View : The Israeli government's decision to force incumbent operator Bezeq to open wholesale access to its wireline infrastructure will catalyse investment and growth in the country's broadband sector. This will create much needed growth opportunities for mobile operators and ensure the telecoms market can keep up with the demands of Israel's vibrant IT market.

Key Data

  • Mobile subscriptions declined by 0.3% y-o-y in the 12 months to June 2014. This was a total net subscription loss of 28,000.

  • The rate of decline of the market share weighted average ARPU accelerated in H114, with a decline of 6.1% compared to a decline of 4.7% in FY13.

  • The fixed telephony and fixed broadband...

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Water

Israel Water

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BMI View : This quarter we have substantially upgraded and expanded our water forecasts due to the release of new historical data and the addition of new indicators. We now provide forecasts for extraction by source (ground, surface, river and desalination) along with treated wastewater. Overall, we view the Israeli water sector as offering limited opportunities for services and utilities companies, but substantial potential for water infrastructure companies. In particular, we anticipate significant long-term development of the wastewater collection, treatment and redistribution infrastructure.

Israel will require USD53.7bn in funding to develop water infrastructure projects over the next 40 years. The sum is in line with the Israeli Water Authority Council's development plan. Infrastructure projects will focus on desalination, with the Israeli government aiming to reach 750 cubic...

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