Merrill Lynch cuts Israel '09 GDP estimate to zero
Financial management and advisory company's analysts slash its real growth estimate for Israeli gross domestic product in 2009 to zero from 1% as result of a downturn in United States, estimate Bank of Israel will continue to lower short-term borrowing costs this year to rate of 1% from 1.75% currently
Merrill in a report issued on Sunday also estimated that the Bank of Israel will continue to lower short-term borrowing costs this year to a rate of 1% from 1.75% currently.
"The Israeli economy faces one of its most challenging periods since the 2001-2002 recession," Merrill emerging markets analyst Turker Hamzaoglu wrote in the report. "We now expect real GDP to stay flat in 2009, the current account balance to slip into deficit and the budget deficit to widen.
"As the fiscal stimulus will not come until mid-second quarter 2009 at the earliest due to parliamentary elections in February, the burden is on Bank of Israel for now."
He noted that Israel is a small and open economy, with 70% of its exports going to the United States and Europe.
Hamzaoglu projects a budget deficit of 4.2% of GDP in 2009 after an estimated 1.4% deficit in 2008. He also expects a current account deficit in Israel's balance of payments of 1% of GDP this year after a flat 2008.
The Bank of Israel forecasts 2009 growth of 1.5% but the bank has indicated it would lower its estimate should the global economy slow more than expected. Bank of Israel Governor Stanley Fischer has chopped Israel's key lending rate by 2.5 percentage points over the last three months.
"The Bank of Israel has been globally one of the most proactive central banks with aggressive rate cuts and targeted monetary policy responses so far. Together with the expected fiscal stimulus, its policy is likely to pay off later in the second half of 2009," Hamzaoglu said.
Despite lack of a budget, the Finance Ministry has unveiled steps to stimulate the economy and ease the credit crunch.
Hamzaoglu said the conflict between Israeli forces and Hamas militants in Gaza would have little impact on the economy and financial markets.
"Increased geopolitical uncertainties and/or elections in Israel have historically had limited impact on domestic markets. There is little reason to expect it to be any different this time," he said. "Still, the duration of the conflict in Gaza and its future course given the parliamentary elections cast some clouds over (the) macro outlook."
