Bethel Finance:Israel GDP growth to ease, needs to cut debt

www.bethelfinance.com
Israel's economy is expected to grow slightly less than 3% in 2012, accelerating to 3.75% in 2013, the International Monetary Fund said on Monday, urging the government to focus on cutting public debt.


"A severe downturn in 2012 is unlikely ... but the output gap will likely reopen a little," the IMF said in its annual report on Israel, adding much depends on economic developments abroad.


Israel also needs to restrain spending on defense in 2013 and the country may have scope to cut interest rates further, the fund said.
The IMF's growth projection for this year is roughly in line with the Bank of Israel's estimate of 2.8% and the Finance Ministry's forecast of 3.2%.


Israel's economy grew 4.8% last year, according to preliminary official figures.


The fund said Israel needs to do more to lower its public debt burden, which is high relative to stronger developed and emerging market countries. Part of the problem stems from regional tensions and the need for high military expenses that constrain the budget.


"The top priority is to keep public debt on a downward track over the medium term. This will maintain confidence in Israel despite strained international markets, and so allow some flexibility in the deficit path in the short term," the IMF said.


It welcomed a decision to phase out a reduction in tax rates and to stick to fiscal discipline in the wake of a wave of social protests last summer.


"These actions have helped to underpin continued investor confidence in the Israeli sovereign in a difficult global environment," it added.


The IMF forecast Israel's budget deficit at 3-3.5% of gross domestic product in 2012, above a 2% target. The Finance Ministry has estimated 3.4% due to a shortfall in tax income.


For 2013, the IMF said Israel needs to restrain defense and other spending while seeking ways to raise additional revenues to keep the deficit under control.


The IMF said Israel's monetary stance was "broadly appropriate" under current forecasts but there could be scope for further rate cuts should the fiscal environment improve.


More cuts would also be needed in the event of a major external shock.


The Bank of Israel has cut its benchmark lending rate to 2.5% from 3.25% since last September to protect Israel's economy from a global slowdown – particularly in Israel's largest trading partner, Europe.


The IMF also recommended that the central bank prepare an exit strategy for its program of buying foreign currency. Israel bought tens of billions of dollars from March 2008 through July 2011 to boost its reserves and weaken the shekel.


The shekel's depreciation has made intervention unnecessary since last July.


"While continued use of these instruments is appropriately not ruled out, continued signals that the clear preference is for their use to remain the exception rather than the rule will support the credibility of inflation as the prime target for monetary policy," the IMF said.