Israel Punches Above Weight as GDP Beats Developed World

Never mind the collapse in confidence in Europe, the Palestinian proposal for United Nations recognition and heightened tensions with neighboring Egypt and longtime ally Turkey. The Israeli economy just keeps growing faster than the rest of the developed world.

The International Monetary Fund this week raised its forecast for the country and cut its estimate for the global economy on the impact of the European debt crisis. Israel’s gross domestic product will expand 4.8 percent this year, according to the Washington-based lender. That’s up from an April forecast of 3.8 percent and triple the pace for the average of the 34 advanced economies.

Citigroup Inc. (C) said on Sept. 18 it would establish a new Israeli research center and Standard & Poor’s a week earlier raised the country’s credit rating. It cited the discovery of two gas fields off the coast of Israel that hold an estimated 25 trillion cubic feet of the fuel. Mellanox Technologies Ltd. (MLNX), the 12-year-old Israeli adapter maker part-owned by Oracle Corp., says sales will grow 80 percent in the third quarter.

“The Israeli economy is very vibrant,” Finance Minister Yuval Steinitz said in a Sept. 20 interview with Bloomberg Television. “We enjoy very low unemployment and nice economic growth and this is mainly because we managed to develop very advanced high tech industries and very strong exports.”

Technology Capital

The stock market in Israel, whose population of 7.8 million is similar to Switzerland’s, was upgraded to developed-market status by MSCI Inc. in May 2010, the same month the 63-year-old country was accepted into the Paris-based Organization for Economic Cooperation and Development. The country has about 60 companies traded on the Nasdaq Stock Market, the most of any nation outside North America after China and is also home to the largest number of startup companies per capita in the world.

Israel ranks third in terms of projected growth this year among MSCI’s list of 24 developed economies, after 6 percent for Hong Kong and 5.3 percent for Singapore, according to the IMF.

“Israel’s exports are high-added value exports like informatics and technology,” said Jean-Dominique Butikofer, a fund manager who helps oversee about $1 billion of emerging- market debt at Union Bancaire Privee in Zurich, including quasi- sovereign Israeli bonds. “They’re not exporting Gucci bags. If there’s a slowdown, these are the kind of assets that are good to have.”

Talent Pool

Venture-capital backed Israeli technology companies raised $364 million in the second quarter of this year, a 77 percent jump from the $206 million raised in the year-earlier period, according to PricewaterhouseCoopers LLP Moneytree report. Seventy-six companies raised funding in the three-month period, compared with only 60 last year, the report said.

“One reason that the economy continues to do well is the component of innovation and ability to adapt to a changing environment,” Citigroup Israel Managing Director Ralph Shaaya said in explaining the New York-based bank’s decision to locate a research center in Israel. ‘There is a rich pool of talent in the high tech sector. The propensity for innovation is high.”

For Mellanox, orders are persisting even as global growth falters.

“In these situations people tend to look for products that do more with less,” Chief Executive Officer Eyal Waldman said in an interview on Aug. 29. “We still see the orders going in so we don’t feel the macro waves coming.”

Shares of Mellanox have jumped about 28 percent in Tel Aviv trading this year, compared with a 21 percent drop on the benchmark TA-25 index. In New York, shares gained about 23 percent, compared with a drop of about 4 percent in the Nasdaq composite index.

Political and Economic

The good times may not last. After withstanding a Palestinian uprising in 2000 that frightened away tourists and deterred foreign investment and a credit crisis in 2008, Israel now faces troubles both political and economic.

Palestinian Authority President Mahmoud Abbas plans as early as tomorrow to ask the Security Council to recommend that Palestine become the world body’s 194th member. The U.S. has threatened to veto any resolution in the Security Council.

Bank of Israel Governor Stanley Fischer, whose actions in 2008 helped the economy recover from the global financial crisis, this week voiced concern about the possible effects a prolonged global slump and geopolitical friction could have in coming months. His worry was reflected in the IMF forecast for 2012, which predicts a slowing to 3.6 percent.

Lowest Jobless Rate

Israel has emerged from economic turmoil before. In 2000, as peace with the Palestinians looked possible following the 1993 Oslo accords and the Israeli technology industry took off, growth was at 9.1 percent. Then, in December, the second intifada, or Palestinian uprising, broke out, just as the technology bubble burst on world stock markets. In 2001, Israel contracted by 0.1 percent and in 2002, by 0.6 percent.

By 2004, growth had returned to 5.1 percent; it reached 5.7 percent in 2006. Israel’s unemployment rate declined to 5.5 percent in the second quarter of this year, the lowest level since at least 1985.

Still, next year’s IMF outlook of 1.8 percent growth for the U.S. and 1.1 percent growth for the euro area, Israel’s two main markets, is likely to moderate demand for the country’s exports, one of the main growth engines of the $217 billion economy. The Palestinian statehood bid could give the new entity more legal clout or raise nationalism pressure should the Security Council vote to reject it.

Turkey Expulsion

Israel is also facing security threats as the so-called Arab Spring creates turmoil in its Middle Eastern neighbors. In Egypt, the pipeline that carries gas to Israel has been bombed four times since the January uprising against former President Hosni Mubarak. A cross-border attack by terrorists who came from the Sinai peninsula killed eight people near the resort city of Eilat in August.

Turkey, one of Israel’s largest regional trading partners, expelled the Israeli ambassador and halted defense purchases after Israel refused to apologize for a commando raid last year on a Turkish vessel attempting to breach the blockade of the Hamas-controlled Gaza Strip that left nine dead.

Israeli five-year credit-default swaps, or the cost of protecting government debt against non-payment for the period, are at 190, the highest level in more than two years, according to data provider CMA. It is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The shekel has weakened more than 5 percent this year, headed for its biggest annual drop against the dollar since 2005 when it fell 6.1 percent.

Investment Grade

“We weren’t Switzerland to begin with,” said Yaniv Pagot, chief strategist for the Ayalon Group, a holding company with interests in insurance, the capital market, and real estate. “We’ve had the Lebanon War, the Cast Lead military operation in the Gaza Strip, and the economy has dealt with temporary situations. If the situation lasts longer, if it becomes permanent, that could have an impact.”

The economy may already be feeling the bite. Exports, excluding ships, aircrafts, and diamonds, declined for the fourth month out of five in August to their lowest since January, according to seasonally adjusted figures.

This didn’t deter Standard & Poor’s from raising Israel’s credit rating earlier this month to A+, its fifth-highest investment-grade rating, just a few weeks after cutting the U.S. and before cutting Italy. S&P cited the two gas fields, Tamar and Leviathan, off its Mediterranean coast.

“You have a situation where the global economy is clearly running into a roadblock and having a tough time while the Israeli economy is going to bend but it isn’t going to break,” said Daniel Hewitt, senior emerging-market economist at Barclays Capital in London. “We think Israel can maintain positive growth. Israel has a strong economy with a strong base.”

To contact the reporters on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net Gwen Ackerman in Jerusalem at gackerman@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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