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.
Israel Country Risk
Political risks have increased sharply, with more than one hundred Israeli and Palestinian deaths recorded between October 2015 and January 2016, and with no sign of appeasement in tensions. 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. Economic growth will accelerate over the coming quarters, as government spending increases, and as exports and private consumption pick up following one-off slumps.
A delay in the Fed hiking its policy rate would lead to the shekel appreciating sooner than we anticipate. The export sector - which accounts for 35% of GDP - would suffer from a strengthening currency.
The ultra-Orthodox push to roll back on...
Israel Operational Risk Coverage (9)
Israel Operational Risk
Israel Operational Risk
BMI View: Israel presents some major trade and investment risks for investors despite the organization of its market economy and open attitude to foreign investment. The most significant risks are posed by relatively high tax rates and time-consuming 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 57.7 out of 100 overall in the Trade and Investment Risk Index, placing it seventh regionally after the UAE, Qatar, Saudi Arabia, Jordan, Bahrain and Oman and 65th out of 170...
Israel Crime & Security
Israel Crime & Security
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.
Israel Labour Market
Israel Labour Market
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...
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...
Israel Trade & Investment
Israel Trade & Investment
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...
Israel Industry Coverage (19)
BMI View: We forecast that Israeli new passenger car sales outperformed commercial vehicles across 2015 amid a mixed economic backdrop and with domestic security risks rising. For 2016, we expect this outperformance of passenger car sales over commercial vehicle sales to continue.
|Passenger Car And Light Commercial Vehicle Sales|
Israel Commercial Banking
|Date||Total assets||Client loans||Bond portfolio||Other||Liabilities and capital||Capital||Client deposits...|
Israel Consumer Electronics
BMI View: We are anticipating a modest recovery to take place in the consumer electronics segment in 2016. 2015 saw the market hard hit by a weakening shekel and subsequent contractions in the three major segments. Our forecast now better reflects Israel's status as a lucrative market in per capita terms as a result of market maturity. The other side of this is however the reduced growth prospects for device spending growth over the medium term compared to emerging markets. The forecast revision does not impact our assessment of Israel as one of the most mature markets 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.
Computer Hardware Sales: USD1.088bn in 2016, up 6.8% y-o-y in US...
Defence & Security
Israel Defence & Security
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...
Food & Drink
Israel Food & Drink
BMI View: We hold a positive outlook for the Israeli food and drink industry and forecast a steady headline food consumption growth averaging 4.1% per annum between 2014 and 2019. The industry expansion will be supported by robust private consumption growth, benefiting from favourable labour market situation, gradually rising wages and low inflation levels. That said, stronger growth will be prevented by already high per capita spending on food and drink as well as relative maturity of the market.
Headline Industry Data
Total food consumption (local currency) growth (y-o-y) in 2015: +2.6%; CAGR 2014-2019: +4.1%
Per capita food consumption (local currency) growth (y-o-y) in 2015: +3.0%; CAGR 2014-2019: +2.7%
Alcoholic drinks value (local currency) sales growth (y-o-y) in...
Israel Freight Transport
BMI View: We forecast positive growth across Israel's freight transport modes in 2016 and 2017. This is an improvement on recent years, when the sector has seen declining volumes on air planes and at the country's major ports, owing to sluggish economic growth - domestically and in major trade partner Europe - and political instability on its borders with other states, and with Gaza. Political risk is always a threat in Israel and could derail our forecasts should further war break out with Gaza or other of Israel's neighbours.
Israel will see a recovery in its total trade real growth in 2016. We...
Israel Information Technology
BMI View: Israel's IT industry registered strong export performance in 2015, led by the chip industry, but domestic IT spending weakened slightly as shekel depreciation was a drag on confidence and reduced the affordability of imports. We believe that the slowdown will be short-lived and forecast total IT market spending will increase at a CAGR of 5.6% 2016-2020 to a total of ILS29.2bn, with software and IT services expected to lead the market as the adoption of cloud computing services and IoT services increases. Meanwhile, a mature hardware market means that segment will underperform, but income growth trends point to opportunities at the premium end of the market that could offer wider margins.
Latest Updates & Industry Developments
IT hardware sales will expand from ILS6.25bn in 2016 to...
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. 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 is relatively well...
BMI View: Both the life and the non-life segments of Israel's sophisticated insurance sector should benefit from the ageing of the population. There are upside risks to our forecasts for the life segment; however, there are both upside and downside risks for the smaller non-life segment.
Israel Medical Devices
BMI View: Israel represents one of the most attractive medical device markets in the region, valued at USD1,128.1mn in 2014, equal to USD144 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. We expect the market to expand at a CAGR of 5.6% in US dollar terms during our forecast period, taking the total to USD1,478.7mn by 2019, or USD176 per capita.
|Total (USDmn) ...|
Oil & Gas
Israel Oil & Gas
BMI View: Prime Minister Benjamin Netenyahu is expected to pass the natural gas framework in December 2015, stabilising the uncertainty in Israel's offshore regulatory and spurring new exploration. Small-scale gas exports to Jordan will begin from 2017.
Israeli petrochemicals margins grew strongly in 2015 due to lower naphtha costs, which offset sluggish output and falling product prices. Israel's refinery sector has capitalised on imports of oil from Kurdistan as well as lower global oil prices, which has been fed through the production chain. Producers will be banking on improved demand to boost growth in earnings in 2016.
Naphtha costs will be crucial to defending and growing petrochemicals margins over the medium term. The theoretical surplus between supply and demand in the global oil market will grow over the coming years, precipitating a decline in the price of oil and a corresponding decline in naphtha feedstock costs. For Israel's relatively small, naphtha-fed petrochemicals industry, this will be crucial to ongoing profitability.
At issue are the sector's ageing plants, which are under investigation for environmental crimes, with calls...
Pharmaceuticals & Healthcare
Israel Pharmaceuticals & Healthcare
BMI View: Our moderate growth outlook for Israel's pharmaceutical sector is supported by the same modest increase in funding for the health services basket. The health basket does include innovative treatments, although drugmakers will see opportunities limited by budgetary restraints. However, proposed changes to the health insurance law will expand healthcare access, providing pharmaceutical companies with further commercial opportunities.
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. Forecast unchanged from Q415.
Healthcare: ILS80.67bn (USD22.55bn) in...
BMI View : During the period 2016 until 2025, Israel's total power output will increase from 69.62TWh to 78.82TWh, equivalent to a y-o-y average growth rate of just over 1.0%. Increasingly, natural gas will play a more dominant role in the country's power makeup, as the government seeks to capitalise on the enormous Tamar and Leviathan gas finds made off its coasts during 2009 and 2010 respectively, even if there have been delays in bringing these new sources of output online efficiently.
Israel Real Estate
BMI View: A key theme that we forecast for 2016 will be subdued supply, as a result of increasing conflict affecting confidence in the country. However, Israel remains an outperformer regionally in terms of the established nature of the real estate sector, and in the short term growth in rental rates is expected to remain stable. We expect rental rates to rise from 2017 onwards as the currency depreciates slightly after a faster-than-expected appreciation in 2015.
We expect Israel's economic growth to outperform most of its developed peers in 2016, as government spending and exports pick up from sluggish or negative growth rates in 2015 on the back of capped public expenditure and a major strike in the phosphate industry, and as retail sales recover somewhat despite continuing violence between Israelis and Palestinians. As a result, we forecast the Israeli economy to grow by 3.4% in...
BMI View: We hold our positive outlook for Israel's retail sector and forecast total household spending to grow by 4.6% in 2016. The recent VAT cuts and reduction of water and public transportation tariffs, combined with historically low bank interest rates and a strong labour market situation, will boost household spending across all retail sectors over the coming year. However, we note that housing & utilities will absorb the majority of spending growth as Israeli households will feel increasingly confident to purchase new homes or invest their savings into real estate.
|Headline Household Spending|
BMI View: We expect positive growth across the three primary Israeli ports in 2016 - Ashdod, Haifa and Eilat - as Israel enjoys accelerating economic growth. Crucially, the drivers of this growth will be key in supporting an expansion in port container volumes. Private consumption and exports will increase following a slump in Q215, supporting box traffic in both directions through the facilities. Unemployment will remain low, boosting domestic consumer demand, while a relatively upbeat outlook for the eurozone in comparison to recent years, and a resurgent US economy, will support exports.
Headline Industry Data
2016 port of Haifa total tonnage throughput to grow by 2.5%, and to average growth of 4.1% to 2020....
BMI View: We are concerned about the sustainability of the Israeli mobile market business model as a multitude of operators are competing in the market with very different business models. The traditional three large operators: Pelephone, Cellcom and Partner are losing subscribers at an increasingly alarming pace. Furthermore, the financial health of these three companies is further dwindling at a rapid pace. The market is being aggressively forced to bare the price competitiveness pressures being exerted by Golan and MIRS, both low cost operators. Both of these operators have significantly altered the competitive dynamics of the market and we fear that organic growth may not be able to return. The three large companies may struggle to find organic growth as 3G / 4G uptake and data services, high drivers of growth, are not present in the market to a degre...
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...