Israel

Politics:

• Analysis

  Israel politics: Quick View - Yisrael Beiteinu leader decides to step down

  Event

  Avigdor Lieberman, Israel's foreign minister, resigned on December 14th, a day after he was indicted on charges of fraud and breach of trust-and just over five weeks ahead of the general election.

  Analysis

  Mr Lieberman is arguably the second most powerful figure in Israeli politics today, after his party, Yisrael Beiteinu (YB), forged an electoral pact with Likud-headed by the prime minister, Binyamin Netanyahu-last month. Recent polls have predicted that the combined entity (Likud-YB) is likely to capture between 35 and 39 seats in the 120-seat Knesset (parliament), nearly double the likely tally of its nearest rival, the Labour Party. Mr Lieberman was expected to take either the powerful defence portfolio or the finance portfolio in the next government, placing him on course to inherit eventually the party leadership from Mr Netanyahu.

  The indictment follows an investigation that lasted over 12 years. The current attorney-general, Yehuda Weinstein, decided not to press the most serious charges, for lack of compelling evidence. Although from a strictly legal standpoint the remaining charges were arguably not serious enough to require his resignation, Mr Lieberman agreed to do so voluntarily, as well as surrender his Knesset immunity. His legal-political strategy is to continue running for a Knesset seat-which he is allowed to do-and to settle the charges against him as quickly as possible, either through a speedy trial or a plea bargain. The key to his political future is whether he can avoid being convicted of a crime of moral turpitude, which would bar him from cabinet office for seven years, or a conviction of any kind after the January 22nd election, which would force him to vacate his Knesset seat.

  Politically, Mr Lieberman could easily survive his legal problems. His supporters are unlikely to be bothered by allegations of corruption-given that they regard the state prosecutor as biased against right-wing politicians, Russian-speaking immigrants (YB's main power base) and other groups from outside the traditional political establishment. Nonetheless, Mr Lieberman may find it difficult to navigate the legal system. A conviction could leave him as an important behind-the-scenes figure but constrain his political power-and block, perhaps permanently, his ascent to the prime minister's office.

  December 17, 2012

• Background

  Israel: Key figures

  Binyamin Netanyahu

  In his second term as prime minister (the first was in 1996-99), Mr Netanyahu has displayed improved political skills, balancing his hawkish coalition against US diplomatic pressure. He has also sought to build on his record of significant achievement as a reformist finance minister in 2003-05, by pursuing structural reforms and tax reductions. His success in guiding Likud back to power—after its split in late 2005 led to its worst-ever result in the 2006 general election—has enabled him to shift the party toward more moderate and pragmatic policy positions.

  Avigdor Lieberman

  An aide to Mr Netanyahu in the 1990s, Mr Lieberman has emerged as the most successful of Israel's Russian-born politicians. By attracting the support of immigrants from the former Soviet Union, his party, Yisrael Beiteinu, won 11 parliamentary seats in 2006 and 15 in 2009. This achievement has propelled him to the posts of deputy prime minister and foreign minister. But, although his abrasive style seems unsuitable for his office, the main threat hanging over him is a series of ongoing investigations into alleged corruption.

  Ehud Barak

  A former army chief of staff and prime minister from 1999 to 2001, Mr Barak returned to politics in 2007, wresting back the Labour Party leadership and the post of defence minister. He retained both posts in the wake of the 2009 election, and has since largely neutralised his intra-party opposition, without improving his overall popularity. As defence minister he will continue to focus his attention on the perceived threat from Iran.

  Tzipi Livni

  Ms Livni entered politics in 1999. She joined Ariel Sharon when he left Likud to establish Kadima in late 2005, serving as foreign minister in Ehud Olmert's government and replacing him as party leader in September 2008. However, after failing to reconstruct Mr Olmert's coalition, she was obliged to call an early general election, which she lost. As opposition leader she has proved resolute, successfully thwarting attempts to split the party and/or replace her.

  Stanley Fischer

  A former IMF chief economist and renowned academic, Mr Fischer surprised the global financial elite by accepting in January 2005 the Israeli government's offer to serve as the governor of the Bank of Israel (the central bank). His swift response to the global crisis in 2008 is widely credited with helping the Israeli economy navigate the ensuing turmoil with relatively little damage. Mr Fischer was reappointed to a second five-year term of office beginning in May 2010.

  May 13, 2010

• Structure

  Israel: Political structure

  Official name

  State of Israel

  National legislature

  Unicameral Knesset of 120 members directly elected by proportional representation for a four-year term. Universal direct suffrage over the age of 18

  National elections

  Parliamentary election: February 1oth 2009; next election scheduled for January 2013

  Head of state

  President (largely a figurehead), elected by Knesset majority for a five-year term. Currently Shimon Peres, who was elected in July 2007

  National government

  Cabinet, responsible to the legislature; the prime minister, Binyamin Netanyahu, leads a coalition government comprising his party, Likud, together with Yisrael Beiteinu, Shas, United Torah Judaism, Atzmaut and HaBeyit HaYehudi

  Main political parties

  Kadima (centrist); Likud (right-wing; leads the government); Yisrael Beiteinu (YB; a right-wing immigrant party); Labour Party (left-wing); Ha'atzmaut (centrist breakaway from Labour that has stayed in the government); Shas (a religious party); HaBeyit HaYehudi (right-wing); United Torah Judaism (an ultra-Orthodox party that includes Agudat Israel and Degal Hatora); Meretz; United Arab List; Hadash (communist, predominantly Arab); Balad (Arab)

  Key ministers

  Prime minister, economic strategy minister, pensioner affairs minister & health minister: Binyamin Netanyahu (Likud)

  Vice-prime minister (& regional development minister): Silvan Shalom (Likud)

  Vice-prime minister (& strategic affairs minister): Moshe Ya'alon (Likud)

  Agriculture & rural development: Orit Noked (Atzmaut)

  Communications: Moshe Kahlon (Likud)

  Culture & sport: Limor Livnat (Likud)

  Defence (& deputy prime minister): Ehud Barak (Atzmaut)

  Education: Gideon Saar (Likud)

  Environment: Gilad Erdan (Likud)

  Finance: Yuval Steinitz (Likud)

  Foreign affairs (& deputy prime minister): Avigdor Lieberman (YB)

  Home front defence: Matan Vilnai

  Housing & construction: Ariel Atias (Shas)

  Immigrant absorption: Sofa Landver (YB)

  Intelligence & atomic energy: Dan Meridor (Likud)

  Interior: Eliyahu Yishai (Shas)

  Internal security: Yitzhak Aharonovitch (YB)

  Justice: Ya'akov Ne'eman (not MP)

  Minorities & trade, industry & labour: Shalom Simhon (Atzmaut)

  National infrastructure: Uzi Landau (YB)

  Religious affairs: Yakov Margi (Shas)

  Strategic affairs: Moshe Ya'alon (Likud)

  Tourism: Stas Misezhnikov (YB)

  Transportation & road safety: Yisrael Katz (Likud)

  Welfare & social services: Moshe Kahlon (Likud)

  Speaker of the Knesset

  Reuven Rivlin

  Central bank governor

  Stanley Fischer

  November 05, 2012

• Outlook

  Israel: Key developments

  Outlook for 2013-17

  • A general election will take place on January 22nd 2013. Although the most likely outcome is the formation of another right-wing coalition, efforts by centre-left parties to form a more united front could still cause an upset.
  • The upheavals in the Middle East pose risks for Israel's security, with arms stockpiling in Gaza and chaos in Sinai and Syria. A pre-emptive strike by Israel against Iran's nuclear facilities is unlikely but cannot be ruled out.
  • We expect GDP growth to remain sluggish in 2013, as Israel's export-dependent economy battles against external headwinds. Growth will pick up to an average of 4.9% in 2014-17, helped by a recovery in the global economy.
  • Monetary policy will be loose in 2013, as inflation remains subdued. Policy will then be tightened in 2014-17, as demand growth and inflation pick up.
  • The fiscal deficit will edge down in 2013, helped by the passage of tough tax and spending measures. By the end of the forecast period, the budget will have moved into surplus, helped by rising royalties on gas.
  • The New Israeli shekel will depreciate against the US dollar in 2013, reflecting a loose monetary policy and lacklustre export growth. The shekel will then appreciate in 2014-17 as the external balance strengthens.
  • The current account will remain in deficit in 2013, reflecting sluggish global demand. Stronger export growth and the start of large-scale domestic natural gas production will underpin a return to surplus in 2014-17.

  Review

  • The Knesset (parliament) has approved a proposal by the prime minister, Binyamin Netanyahu, to hold a general election on January 22nd, giving the parties less than 14 weeks to prepare for the vote.
  • Mr Netanyahu and his foreign minister, Avigdor Lieberman, have unveiled plans for an alliance between Likud and Yisraeli Beiteinu, which, if it goes ahead, would see both parties campaigning jointly for seats.
  • According to the latest "flash" estimate from the Central Bureau of Statistics, the economy will expand by 3.5% in 2012, supported by a 5.6% rise in exports.
  • The trade deficit fell sharply in September, helped by a drop in imports but also a rise in high-tech exports.
  • The consumer price index was unchanged in month-on-month terms in September, following a 1% rise in the previous month.
  • Helped by the subdued outlook for inflation, the central bank has decided to cut its base rate by a further 25 basis points, to 2%.

  November 05, 2012

Economy:

• Background

  Israel: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	7.7	Population growth	1.7
  GDP (US$ bn; market exchange rate)	243.7	Real GDP growth	4.1
  GDP (US$ bn; purchasing power parity)	236.5b	Real domestic demand growth	4.0
  GDP per head (US$; market exchange rate)	31,454	Inflation	2.9
  GDP per head (US$; purchasing power parity)	30,533b	Current-account balance (% of GDP)	2.4
  Exchange rate (av) NIS:US$	3.6	FDI inflows (% of GDP)	4.0
  a Actual. b Economist Intelligence Unit estimates.

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  Background: The State of Israel was established in 1948. In the June 1967 war Israeli troops captured and occupied the Sinai, the Gaza Strip, the West Bank and the Golan Heights, after which Israel annexed East Jerusalem. Sinai was returned to Egypt in 1982, following a peace agreement in 1979. In 1993 a peace accord with the Palestine Liberation Organisation led Israel to withdraw from most of the Gaza Strip and parts of the West Bank, but the peace process has since been derailed. The political scene was long dominated by two parties, Labour and Likud. Labour is enjoying a resurgence, after being largely supplanted by Kadima, a centrist party, which won the March 2006 election but was sent into opposition in February 2009.

  Political structure: Israel has a parliamentary system of representative government. The formal head of state is the president, who is elected by the legislature for a seven-year period, but his powers are largely ceremonial. The Knesset, a 120-seat unicameral parliament, is elected at least once every four years under a proportional-representation system. The leader of the party most likely to marshal a majority in the Knesset is called on by the president to form a government.

  Policy issues: Security issues remain paramount. Increased instability arising from the political revolutions in the Arab world and from Iran is perceived as the primary threat. Relations with the Palestinians will be placed on the backburner. Israeli governments have made substantial progress in liberalising and stabilising the economy but socioeconomic inequalities will preoccupy governments in the coming years.

  Taxation: Corporation tax rose from 24% to 26% in 2012. The top rate of income tax rose from 44% in 2010 to 48% in 2012 and will rise to 50% for the highest earners in 2013. Capital-gains tax rates also rose in 2012. Value-added tax (VAT) was cut from 16.5% to 16% in 2010 but increased to 17% on September 1st 2012. Customs duties are to be cut gradually in 2012-17. Foreign investment, venture capital and expenditure on research are eligible for extensive tax benefits.

  Foreign trade: A weakening in export performance will have led to a sharp increase in the merchandise trade deficit in 2012. The deficit will narrow over the forecast period, finally moving into surplus in 2017, as increasing offshore gas supplies reduce the energy import bill and support rising exports of gas.

  Major exports 2011	% of total	Major imports 2011	% of total
  Chemicals and chemical products (excl refining)	28.4	Fuel	18.7
  Polished diamonds (gross)	19.0	Diamonds (gross)	14.0
  Electronic communication, medical & scientific equipment	13.5	Machinery & equipment	12.3
  Electronic components & computers	7.5	Consumer non-durable goods	8.2
  Machinery & equipment	5.1	Chemicals & chemical products (excl refining)	6.8
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  US	33.3	US	12.0
  Hong Kong	9.2	China	7.5
  Belgium	6.5	Germany	6.3
  UK	5.8	Belgium	6.1
  India	5.2	Switzerland	5.5

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  December 01, 2012

• Structure

  Israel: Economic structure

  Data and charts: Annual trends charts

  
  

  

  November 05, 2012

• Outlook

  Israel: Country outlook

  Israel: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The political scene has been overshadowed recently by the eruption of violence between Israel and Palestinian militants in the Hamas-controlled Gaza Strip. However, with a ceasefire now in place, attention will shift increasingly to the forthcoming general election (assuming the ceasefire holds). Polling is scheduled to take place for the Knesset (parliament) on January 22nd. Although the prime minister, Binyamin Netanyahu--who is the leader of the Likud party--could have waited until later in 2013 before seeking a fresh mandate, a reluctance on the part of some of his coalition partners to support the tough measures included in next year's draft budget persuaded him to opt for an earlier polling date. The prime minister is no doubt calculating that, once the election is out of the way, he will be in a much stronger position to push through the unpopular spending cuts and tax increases that are needed to maintain Israel's hard-won reputation for prudent fiscal management. At present, the ruling coalition controls just 66 seats in the 120-seat Knesset. Mr Netanyahu is also keen to capitalise on the disarray which has existed--at least until recently--in the ranks of the centre-left.

  ELECTION WATCH: The parliamentary term is just over four years. No government has completed a full term since the 1984-88 government of national unity; with elections now due to take place in January (eight months ahead of schedule), this record will remain intact. With a low threshold (2% of the national vote) needed to ensure representation in the Knesset, there will continue to be a multitude of political parties, ensuring the need for another coalition government. Although the Economist Intelligence Unit expects Mr Netanyahu to be returned to power with broadly the same set of partners, this is by no means certain--particularly given the realignments that are currently under way on both sides of the political spectrum.

  INTERNATIONAL RELATIONS: The political upheavals in the Arab world have alarmed many Israelis. The 1979 treaty between Israel and Egypt has secured a lengthy period of peace between the two countries. The Muslim Brotherhood-affiliated Freedom and Justice Party (FJP) is the leading force in Egypt's new government. Much to Israel's relief, the Egyptian president, Mohammed Morsi has acted pragmatically in his response to the recent conflict between Israel and Hamas--playing an instrumental role in helping to broker a ceasefire between the two sides (via his influence on Hamas). In addition, the FJP has shown no inclination to revoke the peace treaty with Israel. However, it could be pushed into a more adversarial stance if the conflict with Hamas were to resume--particularly if Israel were to mount a ground invasion of Gaza. In the meantime, the security chaos in the Sinai Peninsula, which borders southern Israel, is creating a major headache for the defence forces of both countries. With the tacit agreement of Israel, Egypt has stationed tanks and helicopters in Sinai, following a terrorist attack that left 16 of its border guards dead. But at the same time, it has warned Israel that it will not tolerate any incursions by Israeli soldiers into Sinai, even in pursuit of terrorists.

  POLICY TRENDS: Despite Mr Netanyahu's long-standing preference for tax cuts, low public spending and economic liberalisation, his government has been obliged to increase welfare spending, following mass protests over social inequality. Concessions have also been made to soften the impact on households of the higher cost of fuel and other sensitive items and of rises in direct taxation from 2012--which reverse many of the cuts made in recent years. This shift of policy focus is unlikely to change after the election; indeed, it could be reinforced if a centre-left coalition wins the election.

  ECONOMIC GROWTH: According to preliminary estimates, real GDP growth slackened to 2.9% in July-September (in quarter-on-quarter annualised terms). Although the slowdown in the economy continues to be gradual, the third-quarter result represents the weakest growth performance for over three years. Given continuing strong external headwinds, as well as a higher tax burden (following recently announced fiscal changes), there is unlikely to be any pick-up in the growth rate in 2013. However, economic activity will be boosted in the latter part of the forecast period by rising exports, as external demand starts to recover more strongly, leading to an average growth rate of 4.9% in 2014-17.

  INFLATION: Slower economic growth will help to dampen demand-side pressures on inflation in the short term. Together with some moderation in housing prices--helped by a tightening in mortgage lending criteria--we expect inflation to average 2% in 2013, at the mid-point of the central bank's target range of 1-3%. Inflationary pressures will pick up from 2014 onwards, as domestic demand starts to grow more strongly. However, a progressive tightening in monetary policy, together with an appreciation in the New Israeli shekel, will help to keep inflation within the upper part of the target range. A renewed overheating of the housing market remains a risk and may require further macro-prudential measures (on the top of those recently announced) in order to avoid a housing bubble.

  EXCHANGE RATES: In an attempt to reduce upward pressure on the shekel, the authorities have introduced a number of measures aimed at curbing the influx of "hot money" over the past two years. A 10% reserve requirement has been placed on local banks' derivative transactions with non-residents, and the tax exemption that foreigners previously enjoyed on their profits from short-term government debt (makam) has also been removed. In 2013 a large trade deficit, together with a lower interest-rate differential between Israel and key developed economies, is likely to lead to some modest depreciation in the shekel. Later in the forecast period, we expect the shekel to strengthen steadily once more, particularly as rising domestic gas production starts to benefit the external position.

  EXTERNAL SECTOR: Depressed demand in Israel's main export markets will lead to another sizeable merchandise trade deficit (equivalent to 4.2% of GDP) in 2013. Growth in business services exports and tourism will also stay sluggish. As a result, the current account will remain in deficit for the second successive year in 2013--although the forecast shortfall of 0.2% of GDP will represent an improvement on the estimated deficit in 2012 (of 0.6% of GDP). We expect the current account to return to surplus in 2014 as the recovery in export growth accelerates and import costs are held down by the coming on stream of domestic gas supplies. The external balance will continue to benefit from more robust growth in goods and services exports and reduced energy imports over the remainder of the forecast period, with exports of gas making an increasing contribution from 2016-17 onwards. Despite a widening in the income deficit, reflecting increasing dividend payments to international energy companies with stakes in the offshore gas sector, we expect the current-account surplus to reach 3.9% of GDP in 2017.

  December 01, 2012

• Forecast

  Israel: Country forecast summary

  Country forecast overview: Highlights

  • The political outlook will remain uncertain, following the decision by the prime minister, Binyamin Netanyahu, to call an election at end-January--eight months ahead of schedule. The most likely outcome is the formation of another right-wing coalition, but efforts by centre-left parties to form a more united front could (if they prove successful) still cause an upset.
  • Israel's recent conflict with militant groups in the Gaza Strip-as well as an exchange of fire across the border with Syria-underline the potential for increased instability in the wake of the political upheavals in the Arab world. Tensions also remain high as a result of Iran's nuclear programme. Peace talks with the Palestinians would have little chance of success if the current right-wing coalition stays in power. However, the chances of a breakthrough would improve if the centre-left wins the forthcoming election.
  • The government has been obliged to loosen its fiscal deficit target for 2013, owing to a combination of weak revenue growth and rising welfare and defence spending. Additional tax-raising measures have been promised for 2013, although approval of next year's budget will now need to wait until the election is out of the way. Successive governments have provided an array of incentives for investment, especially in technology start-ups, and these should remain.
  • Real GDP growth will remain sluggish, at 3%, in 2013, given the continued weakness in Israel's main export markets. The pace of expansion will accelerate to an average of 4.9% a year in 2014-17, helped by rising exports, steady private consumption growth and investment in energy and transport infrastructure and in housing. Inflation will remain within the 1-3% target range despite a looser monetary stance until 2014.
  • The inflation-targeting capabilities of the Bank of Israel (the central bank) have been reinforced by the passage of a law that formalised the goal of price stability and established a monetary policy committee that includes external advisers. Further reform of financial services regulation is likely.
  • The current account moved into deficit in 2012 and will remain in the red in 2013, owing to a large shortfall on merchandise trade. As a small, export-oriented economy, Israel is heavily dependent on global demand, which will remain weak in the near term. However, world trade will grow more strongly from 2014, leading to a renewed improvement in the current-account position. The exploitation of offshore gas will also reduce the oil import bill from 2014, bringing the external account into comfortable surplus.

  Country forecast overview: Key indicators

  Key indicators	2012	2013	2014	2015	2016	2017
  Real GDP growth (%)	3.0	3.0	4.6	4.9	5.1	5.0
  Consumer price inflation (av; %)	1.8	2.0	2.7	2.9	3.0	2.9
  Budget balance (% of GDP)	-4.0	-3.3	-2.5	-1.5	-0.6	0.5
  Current-account balance (% of GDP)	-0.6	-0.2	1.6	2.6	3.3	3.9
  Commercial banks' prime rate (av; %)	4.0	3.8	5.0	6.0	6.8	7.3
  Exchange rate NIS:US$ (av)	3.87	3.95	3.88	3.75	3.64	3.57
  Exchange rate NIS:US$ (year-end)	3.92	3.88	3.78	3.69	3.60	3.52

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  December 01, 2012

View detailed map

Country Briefing

Land area

20,325 sq km. This does not include the Gaza Strip, the West Bank, East Jerusalem and the Golan Heights, areas occupied by Israel in the 1967 and 1973 Middle East wars

Population

7,759,300 (mid-2011; Central Bureau of Statistics estimate), of whom 5,847,700 are Jewish

Main towns

Population at the end of 2007 (provisional data)

Jerusalem (a): 746,300

Ashdod: 207,300

Tel Aviv-Yafo: (b) 390,400

Petah Tiqwa: 188,900

Haifa: 265,900

Beersheba: 186,600

Rishon le Zion: 224,500

Holon: 169,000

(a) Including East Jerusalem. (b) Municipality of the city of Tel Aviv-Yafo only, does not include population of greater Tel Aviv conurbation.

Climate

Mediterranean

Weather in Jerusalem (altitude 757 metres)

Hottest month, August, 19-29°C (average daily minimum and maximum); coldest month, January, 6-12°C; driest months, May-September, 0 mm average rainfall; wettest month, January, 133 mm average rainfall

Languages

Hebrew and then Arabic are the official languages; however, English and Russian are also widely spoken

Measures

Metric system. The metric dunum (1,000 sq metres) is also in use

Currency

The New Israeli shekel (NIS) became the official currency on January 1st 1986. 1,000 old shekels=NIS 100. There are 100 agorot in NIS 1

Time

2 hours ahead of GMT

Fiscal year

January 1st-December 31st

Public holidays

All religious holidays begin at sunset the day before. Some institutions also close the day before the major religious festivals. March 8th 2012 (Purim; banks only); April 7th-14th (Passover; first and last days are usually public holidays; these fall on Saturdays in 2012 and April 6th and 13th will see most business closed too); April 26th (Independence Day); May 27th (Shavuot); July 29th (Tisha b'Av; banks only); September 17th (Jewish New Year); September 26th (Yom Kippur); October 1st (Sukkot starts); October 8th (Sukkot ends); October 9th (Simchat Torah); December 9th (Chanukah; school holiday)

March 09, 2012