Russian Invasion Of Ukraine To Weigh On Israeli Current Account

Fitch Solutions / Banking & Financial Services / Israel / Fri 18 Mar, 2022

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Key View

  • At Fitch Solutions, we forecast that Israel’s current account surplus will narrow from 4.7% of GDP in 2021 to 4.1% of GDP in 2022.
  • We expect that Russia’s invasion of Ukraine will result in elevated global commodity prices and slower growth in many of Israel’s key export markets.
  • That said, growth in business and tech services, as well as a modest rebound in tourism receipts, will keep the current account in surplus for the twentieth consecutive year.
  • We see limited risks to Israel’s external position, as the country will keep attracting a steady flow of capital, allowing it to maintain a strong buffer of FX reserves.

At Fitch Solutions, we forecast that Israel’s current account surplus will narrow from 4.7% of GDP in 2021 to 4.1% of GDP in 2022. Our forecast puts us in line with Focus Economics consensus and marks a revision of our prior forecast for the surplus widening to 4.9% in 2022, reflecting our weaker growth outlook for Israel’s main export partners and higher prices for imported commodities.

Current Account Surplus To Narrow Amid Widening Of Goods Trade Deficit

Israel - Current Account Balance By Component, % of GDP

f = Fitch Solutions forecast. Source: Bloomberg, Fitch Solutions

Weaker economic momentum in key trading partners caused by Russia's invasion of Ukraine will temper Israel’s goods export growth. We now believe Israeli exports will grow by 8.0% in US dollars in 2022, down from 10.5% previously. We revised down our 2022 real GDP growth forecasts for the Eurozone (from 4.1% to 3.3%) and the US (3.5% to 3.1%) due to our belief that the war will drive up inflationary pressures, which will weigh on consumption, and accentuate supply-chain disruptions.

Granted, we now hold a more optimistic outlook for Israel's fertiliser and gas exports. The Indian government has decided to increase its purchases of Israeli fertilisers in an effort to counteract reduced shipments from Russia and Ukraine. Moreover, the value of Israel’s gas exports – we estimate that the country will sell 12.9bcm in 2022 – will also be boosted by higher global energy prices, as gas prices have jumped together with oil prices (see chart below).

Surge In Oil Prices To Increase Israel's Import Costs

Global - Brent Crude Price, USD per Barrel

Source: Bloomberg, Fitch Solutions

The Ukrainian crisis will also keep prices of commodity imports elevated, further contributing to the narrowing of current account surplus. Since the Russian invasion of Ukraine, Brent crude prices have surged to multi-year highs (see chart above), trending around USD100.0 per barrel as of March 16. This will drive up the cost of oil (around 15.0% of Israel imports) and processed petroleum products, which we estimate account for another 19.8% of total imports. At the same time, prices of wheat and cereals have also skyrocketed. Since our core view is that major combat operations in Ukraine will persist into Q2 22 and that low-level fighting will continue for the duration of the year, we think commodity prices will remain elevated in the coming months. This will boost Israel’s import bills. Overall, we forecast imports goods will grow by 13.5% in US dollars against our previous projection of 9.5%.

That said, strong growth in exports services will keep Israel’s current account in surplus in 2022 for the twentieth year in a row. We anticipate that the services trade surplus will widen from 8.6% of GDP in 2021 to 8.9% of GDP in 2022. As the impact of the pandemic fades, global business activity will continue to normalise in the coming months, fuelling demand among Western corporates for Israel’s business and tech services, which account for around two-thirds of total services exports.

February 2022 Data Point To Start Of Tourism Recovery

Israel - Tourist Arrivals, '000

Source: CBS, Fitch Solutions

Tourism arrivals began to pick up in early 2022 (see chart above) and we expect that this will continue due to the lifting of travel restrictions. The recovery will, admittedly, be muted by the imposition of Western sanctions against Russia, which will limit Russian citizens’ ability to travel abroad. Russians usually make up 7.0% of tourist arrivals in Israel. Even so, we expect that tourist arrivals will rise by over four times the levels of 2021.

Net FDI Likely To Remain In Positive Territory

Israel - Net FDI, USDbn

Source: Bloomberg, Fitch Solutions

Risks to Israel’s external position remain very small. Net Foreign Direct Investments totalled USD19.9bn in 2021, almost twice as much as pre-pandemic levels (see chart above), as Israel’s status as a relative safe haven and strong rapid economic rebound have led investors to move capital into the country. 

We expect that Israeli assets, especially private tech companies, will retain their appeal over the coming quarters, benefiting from the more risk-averse stance of global investors towards public equity markets following the Ukrainian crisis. This will allow the country to continue to accumulate FX reserves, which we forecast will increase from USD213.0bn in 2021 to USD227.9bn, equivalent to 20 months of import cover.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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