Israel: Staff Report for the 2017 Article IV Consultation
Author: International Monetary Fund. European Dept.
Publication Date:
28 Mar 2017
eISBN:
9781475589269
ISBN:
9781475589269
Language:
English
Keywords:
ISCR; CR; debt ratio; labor market; IMF staff calculation; Israel; economy; potential GDP; labor force participation rate; banking system; Inflation; Housing prices; Global
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Israel is enjoying strong economic growth, estimated at 4 percent in 2016, supported by strong domestic demand-partly due to high vehicle sales ahead of a tax increase-and an export rebound. Unemployment declined to 4.4 percent in Q4 2016 and wage increases have picked up. Nonetheless, inflation remained below the 1-3 percent target range of the Bank of Israel (BOI), reflecting external factors and government measures to reduce the cost of living. The BOI has held the policy rate at 0.1 percent since February 2015 and stated that monetary policy in Israel will remain accommodative for a considerable time. Strong revenues contained the fiscal deficit to 2.1 percent of GDP in 2016 and the public debt ratio declined to 62 percent of GDP.

Abstract

Israel is enjoying strong economic growth, estimated at 4 percent in 2016, supported by strong domestic demand-partly due to high vehicle sales ahead of a tax increase-and an export rebound. Unemployment declined to 4.4 percent in Q4 2016 and wage increases have picked up. Nonetheless, inflation remained below the 1-3 percent target range of the Bank of Israel (BOI), reflecting external factors and government measures to reduce the cost of living. The BOI has held the policy rate at 0.1 percent since February 2015 and stated that monetary policy in Israel will remain accommodative for a considerable time. Strong revenues contained the fiscal deficit to 2.1 percent of GDP in 2016 and the public debt ratio declined to 62 percent of GDP.

Context

1. Israel has achieved strong growth, especially in employment, despite the global financial crisis. Growth averaged 3.9 percent (2 percent per capita) in the decade to 2015, well above the 1.7 percent (1.1 percent per capita) mean for advanced economies. Employment surged 36 percent in this period, aided by a 5 percentage point rise in labor force participation following sharp welfare cuts adopted after the dot-com bust in the early 2000s. Labor productivity growth is lower than might be expected, averaging 0.8 percent, in part because the large rise in labor participation weighed on average skill levels.

A01ufig1

Employment Growth in the Past Decade

(Percent change, 2005–2015)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: IMF WEO database; and IMF staff calculations.

2. Yet differences among Israel’s diverse religious and ethnic groups contribute to relatively high poverty.1 Of the population of 8½ million, some 20 percent are Arab Israelis, 10 percent Haredi (ultra-orthodox Jews), and 65 percent other Jews. Haredi and Arab household incomes are reduced by the low participation of Haredi men and Arab women and by the lower average skills and wages of these groups, such that Israel has high poverty rates for disposable income. The low equivalized incomes of Haredi households partly mirror their high number of children and the focus of Haredi secondary schools for males on religious studies rather than math, science, etc.

A01ufig2

Relative Poverty among Advanced Economies 1/

(Percent)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Source: OECD.1/ Share of people below 50 percent of median equivalized disposable Income, In 2014 or latest available.

3. The coalition government faces pressures to lower the high cost of living. The government is currently comprised of six parties with 66 seats in the 120-member Knesset, which has a term of four years, but no Israeli administration has completed a full term since 1988. Since mass protests in 2011 opposing the continued rise in the cost of living, especially the cost of apartments for young families, governments have taken a range of measures aimed at reducing living costs, including cuts in the price of various services and in the VAT rate.

4. Traction of Fund advice is generally good. A number of Fund recommendations have been implemented from the 2012 Financial System Stability Assessment (FSSA), the 2015 Article IV consultation, and 2015 Fund technical assistance on enhancing medium-term fiscal management (Annex I). The Bank of Israel (BOI) is in the process of following up on recommendations from the 2016 technical assistance on banking supervision.

Solid Growth Yet Challenges Ahead

5. Israel’s growth picked up in 2016, supported by strong domestic demand and a rebound in exports. In 2015, growth was 2½ percent, held back by weak exports, which partly reflected company-specific factors.2 Real GDP grew by a preliminary 4 percent in 2016 as domestic demand surged and exports rebounded. Demand benefitted from strong labor market conditions and low interest rates. One-off factors also played a role, including Intel’s fabrication plant upgrade and a spike in vehicle purchases ahead of a tax hike on highly-polluting models, also seen in higher imports and taxes.

A01ufig3

Composition of Real GDP Growth

(Percentage points)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: IMF World Economic Outlook; and IMF staff calculations.

6. Labor market conditions have continued to improve and wage growth is rising from low levels. Employment rose by a solid 2.6 percent y/y in 2016, reflecting continued growth in the working age population and a decline in the unemployment rate of 1 percentage point, while the labor force participation rate remained broadly stable. At 4.4 percent in Q4 2016, the unemployment rate is at an historic low while job vacancy rates are high. Owing to this labor market tightening, nominal wage growth in the business sector picked up to almost 3 percent y/y in the second half of 2016, from below 2 percent in 2014, and real wage gains were about 3½ percent as a result of the decline in the headline CPI. Increases in the monthly minimum wage, of 8.6 percent in 2015 and 13.6 percent in January 2016, may have also contributed to stronger aggregate wage growth.

A01ufig4

Labor Market 1/

(Percent)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Haver Analytics; and IMF staff calculations.1/ Data cover population aged 15 and above.
A01ufig5

Wages and Labor Market Slack

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Haver Analytics; and IMF staff calculations.

7. Government measures to reduce the cost of living and declines in tradables prices have weighed on inflation. Headline CPI inflation remained modestly negative since the second half of 2014, yet turned slightly positive in January 2017. Contributing factors include declines in energy prices, low trading partner inflation, appreciation of the shekel especially against the euro, and various government measures.3 Yet, even excluding energy, fruit and vegetables, and the estimated effect of government measures, CPI inflation was low at 0.2 percent in 2016. Narrowing margins, perhaps due to competition from internet purchases, may also be keeping inflation down.

A01ufig6

CPI Inflation

(Percent change, y/y)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Haver Analytics; Bol; and IMF staff calculations.1/ Excluding fruit & vegetables, and estimated impact of government measures.
A01ufig7

Importing Goods Price Deflation

(Index. 2010=100)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Haver Analytics; Bol; and IMF staff calculations.1/ Excluding ships, aircrafts, diamonds, and fuel.2/ Converted to Shekel

8. Housing prices rose further in 2016, even after nearly doubling in real terms since 2007, yet some softening in market conditions emerged recently. Dwelling prices rose at an average pace of 7½ percent y/y in 2016, with housing loans growing at a similar pace, bringing household debt to a still modest 74 percent of disposable income (Figure 8). Residential investment has risen in response to higher prices, but completions remain below estimated household formation. Nonetheless, mortgage volumes and housing sales slowed during the year and price declines were recorded in late 2016, which may reflect a rise in mortgage interest rates driven by earlier macroprudential measures together with recent tax policy changes on real estate.

Figure 1.
Figure 1.

Israel: The Long View

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Bank of Israel; Central Bureau of Statistics; IMF Information Notice System; and IMF staff calculations.
Figure 2.
Figure 2.

Israel: Recent Economic Developments

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Bank of Israel; Central Bureau of Statistics; Haver Analytics; IMF World Economic Outlook; and IMF staff calculations.
Figure 3.
Figure 3.

Israel: Inflation and Monetary Indicators

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Haver Analytics; Bank of Israel; IMF WEO database; and IMF staff calculations.1/ Excluding fruit and vegetables, and estimated impact of government measures.2/ Crude Oil (petroleum), simple average of three spot prices; Dated Brent, West Texas Intermediate, and the Dubai Fateh, US$ per barrel.3/ A negative change indicates appreciation of the shekel.4/ Real policy rate is calculated as the difference between nominal policy rate and one-year ahead inflation expectations.
Figure 4.
Figure 4.

Israel: Selected Financial Indicators

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Bloomberg; Datastream; Haver Analytics; and Moody’s Analytics CreditEdge.
Figure 5.
Figure 5.

Israel: Exchange Rates and BOP

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Bank of Israel; Central Bureau of Statistics; Haver Analytics; OECD; and IMF staff calculations.1/ Includes medical services, communications, R&D, and IT services.2/ Start-ups are included from 2010.
Figure 6.
Figure 6.

Israel: Housing Market Development

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Central Bureau of Statistics; Haver Analytics; Land and Housing Survey in the UN Sample of Cities (2016); and IMF staff calculations.
Figure 7.
Figure 7.

Israel: Performance of the Israeli Banking System

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: IMF’s Financial Soundness Indicator Database; and Haver Analytics.
Figure 8.
Figure 8.

Israel: Corporate and Household Sector

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Bank of Israel; Israel Central Bureau of Statistics; Haver Analytics; IMF CVU database; Moody’s CreditEdge; and IMF staff calculations.1/ The 2016 Q3 data is estimated with a change in household (excluding the self-employed) loans from domestic financial institutions between end-2015 and 2016Q3.
A01ufig8

House Price and Housing Loans

(Percent change, y/y)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Haver Analytics; and IMF staff calculations.
A01ufig9

Housing Supply and Demand Indicators 1/

(Thous. units; Thous. households)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: CBS; and IMF staff calculations.1/ Annualized based on outturn as of end-2016Q3

9. Although housing prices are clearly high, the extent to which the housing market may be misaligned is uncertain. As discussed in section B, Israeli housing prices are very high, especially in Tel Aviv, with implications for poverty and inequality. Nonetheless, a cross-country econometric analysis suggests the uptrend in real housing prices in Israel is mainly driven by growing incomes, the rising number of households relative to housing supply, and low interest rates, with only a modest estimated overvaluation of 9 percent as of Q3 2016. Yet uncertainty around such estimates is wide, as housing market developments are complicated by purchases for investment purposes by high-income households.

A01ufig10

Housing Market Valuation

(Index; percent)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: CBS; Haver; OECD; and IMF staff estimates.

10. Output growth is expected to settle around 3 percent and inflation is likely to rise gradually. Domestic demand growth is expected to dip in 2017 given the high base in 2016, but a firming in exports reflecting stronger trading partner activity and ongoing investments in the sector will support overall growth in 2017. With unemployment remaining low, and the output and employment gaps broadly closed, a further rise in wage growth along with a rise in international inflation rates makes a rise in CPI inflation likely, although significant uncertainty remains around the timing of such an increase. An eventual rise in interest rates would help moderate domestic demand growth in the medium term, keeping overall growth near potential, estimated at some 3 percent.

A01ufig11

Resource Utilization Indicators

(Percentage points)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Haver Analytics; and IMF staff calculations.

Macroeconomic Indicators

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11. In the longer term, however, changes in the composition of the population could significantly lower Israel’s growth potential and raise poverty. The share of Haredi in the working age population will rise given their higher fertility, as will the share of the Israeli-Arab population though to a notably smaller extent. To illustrate the broad scale of the economic impact, if the labor participation rate of each group remains unchanged from its 2015 level, the total labor force participation rate is projected to decline by almost 3 percentage points in a decade. The lower average productivity of these groups would further lower potential growth. Moreover, a growing share of the population with low wages, or out of the workforce, would exacerbate the already relatively high levels of poverty and inequality.

A01ufig12

Population Composition: Official Projections

(Percent)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Central Bureau of Statistics; and IMF staff calculations.
A01ufig13

Labor Force Participation Scenarios 1/

(Percent)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Central Bureau of Statistics; and IMF staff calculations.1/ Based on Central Bureau of Statistics population projections.2/ Participation rates of each cohort remain at 2015 levels.3/ Participation rates of Haredi men and Arab women rise to level of Haredi women by 2059, participation rates of other cohorts remain at 2015 levels.

12. Risks are wide ranging, with significant downsides requiring strong buffers (Annex II):

  • Domestic/regional: Regional tensions have in the past hit tourism hard and more adverse developments could damage confidence and investment. Housing prices could weaken in coming years, impacting construction and dragging on domestic demand. Yet financial stability would be cushioned by relatively low household debt and the health of banks.

  • External: Weak growth in Israel’s main trading partners would weigh on Israeli exports and growth. Impacts could exceed historical experience with exports being less diverse than those of most advanced economies and with reduced space for monetary policy to cushion shocks.

  • Potential growth/inequality: Limited progress on closing the gaps in participation and productivity of the Haredi and Arab populations may undermine stability by slowing growth and raising inequality. Yet, participation gaps have narrowed and this progress may continue.

13. The Israeli authorities shared a similar macroeconomic outlook. They assessed that the high growth in 2016 reflected broad-based strength in domestic demand and exports, underpinned by supportive macroeconomic policy and improvements in the terms of trade which bolstered real disposable income. They also viewed that the labor market was close to full employment and expected GDP to grow at around 3 percent in the coming years. While noting the resilience that the Israeli economy had shown in the face of a range of shocks, they fully recognized the economic and social challenges posed by the evolving composition of the Israeli population.

Policy Discussions

14. Policies should support fiscal and structural reforms to promote sustained and inclusive growth. Macroeconomic policy should provide a supportive environment for undertaking structural reforms while also protecting buffers in the medium term. Supply-side bottlenecks in the housing market need to be addressed in a lasting manner to help moderate inequality over time and also to help contain macrofinancial risks. Inclusiveness is key to sustaining strong growth in Israel, requiring policies to promote the participation and productivity of the Haredi and Israeli-Arab populations while mitigating poverty without undermining work incentives.

A. Monetary and Exchange Rate Policies

15. Monetary conditions are accommodative, although developments with the shekel and retail interest rates imply some tightening. The BOI has held the policy rate at 0.1 percent since February 2015 owing to inflation being below the 1–3 percent target range, and it has stated that monetary policy in Israel will remain accommodative for a considerable time. Yet the shekel appreciated 5 percent in nominal effective terms in 2016, extending the appreciation trend of recent years, while the average mortgage interest rate (unindexed mortgages) has risen 80 basis points since early 2015 to 3.1 percent (see paragraph 26).

A01ufig14

Monetary Conditions Indicators

(Percent unless otherwise indicated)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Bank of Israel; and IMF staff calculations.

16. Monetary policy should remain accommodative pending a durable rise in inflation and inflation expectations. Core CPI inflation remains below the 1–3 percent target range, even after excluding the impact of energy price falls and government measures to lower living costs. A rise in inflation seems likely given domestic and international developments, yet the timing of this increase remains uncertain, especially in relation to the pass-through from rising domestic wage growth and an easing in the drag from low foreign inflation and shekel appreciation. While longer-term inflation expectations remain anchored to the target, there has been a significant decline in short- and medium-term expectations. In these circumstances, there is a need to avoid a premature monetary tightening before inflation is clearly heading back to target.

A01ufig15

Inflation Expectations

(Monthly average, percent)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Bank of Israel; and IMF staff calculations.

17. A significant deviation of the shekel from fundamentals is not evident (Appendix I). Israel’s real exchange rate appreciation in recent years has lifted it to about 7 percent above its historical average on a CPI basis, and 17 percent higher on a unit labor cost (ULC) basis. The current account surplus of 3.6 percent of GDP in 2016 is above its norm of balance, but high household saving due to mandatory pension contributions and high official and private transfers, could warrant a higher norm. With estimates of undervaluation ranging from 3 to 9.6 percent on approaches favored by staff, it is not clear that the shekel deviates significantly from its fundamental value. Current account inflows are reflected in a combination of portfolio and other investment outflows led by pension funds, partly offset by net FDI inflows into Israel’s vibrant high-tech sector.

18. FX intervention declined in 2016. The BOI purchased the equivalent of $6 billion in 2016, down from $8.8 billion in 2015. About one-third of 2016 purchases were under the pre-announced program to offset lower imports owing to natural gas production, with the remainder aimed at moderating shekel overvaluation. Such purchases enable the BOI to make monetary conditions more supportive while avoiding stoking the property market through interest rate cuts. At the same time, the amounts purchased have not prevented the significant shekel appreciation in recent years.

A01ufig16

Foreign Reserves and FX Intervention

(Billions of USD, unless mentioned otherwise)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Bank of Israel; and IMF staff calculations.
A01ufig17

Indicators of Reserve Adequacy 1/

(As of end-2015)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: IMF WEO database; and IMF staff calculations.1/ Comparator countries have similar tolerance for external risks based on indicators for economic flexibility, market maturity, and market access.

19. Israel’s foreign reserves are comfortable. Foreign reserves ($102 billion at end-February 2017) have remained broadly stable as share of GDP since 2009. Although Israel’s reserves exceed standard metrics relative to imports, short-term debt, and broad money, they do not appear excessive by international standards, especially considering Israel’s geopolitical risk exposure and its limited export diversification.

20. The BOI held broadly similar views on monetary policy yet it considers that the shekel is mildly overvalued. The BOI forecasts inflation to return to within the target range in 2017Q4, and it sees some upside as well as downside uncertainty around this inflation outlook. Nonetheless, it considers that tightening too early would likely be more costly than having to tighten more rapidly at a later stage. However, the BOI’s analysis, based on a range of in-house and external analytical tools, concludes that the shekel is mildly overvalued, driven by spillovers from the very accommodative global monetary policy. The resulting decline in competitiveness was reflected in sluggish goods exports, particularly in the European market. According to the BOI’s analysis, the estimated range for adequate reserves is $70–$110 billion. Reserves are currently within that range.

B. Housing and Macroprudential Policies

21. Housing affordability has deteriorated substantially. The average cost of a home has risen to more than seven times the average household’s annual income, up from a ratio of about five in 2002–07, with affordability significantly worse than in a range of other countries. The situation is especially severe in Tel Aviv, where the price-to-income ratio is almost twice the national average.

A01ufig18

Housing Price-to-income Ratio in Israel

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: CBS; and IMF staff calculations.
A01ufig19

Price-to-income Ratio

(As of 2015Q3)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Demographia International Housing Affordability Survey 2015Q3; CBS; and IMF staff calculations.

22. Elevated housing costs have disproportionate impacts on young and low-income households (Figure 6). Lower-income families can increasingly no longer afford the down payment, resulting in rising rents in the past decade. Increases in rental expenditure as a share of consumption are largest among low-income households, while high-income households seeking investment returns increasingly own more than one dwelling.

A01ufig20

House Price and Share of Renters

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: CBS; and IMF staff calculations.
A01ufig21

Rent as Share of Total Consumption Expenditure

(Percent, by income deciles)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: CBS; and IMF staff calculations.

23. Recent housing market reforms include useful measures, but some initiatives are costly and may not have lasting benefits:

  • Fiscal measures: Several tax measures aim to discourage investor demand: (i) higher transaction taxes on second or subsequent homes until end 2020; (ii) the introduction of a recurrent property tax on owners of three or more houses; and (iii) partial exemptions from capital gains tax on sales of residential properties until end 2017, with full exemptions on investing proceeds of sales in the capital markets. These tax changes may dampen price rises in the near term owing to investor sales, but focusing a recurrent property tax on investors could over time raise rental costs for low-income households, and the ceiling on monthly tax payments is regressive. The Buyer’s Price program helps households purchase a first house, yet it benefits the relatively few households that win a lottery, provides housing supply mostly in the periphery, and comes at an off-budget fiscal cost peaking at 0.2 percent of GDP in 2017–18 (Annex III).

  • Administrative steps: The government is also seeking to reduce the exceptionally long time to complete construction from the start of planning, previously estimated to average 13 years. In 2014 the government established the Housing Cabinet to handle all planning stages and to coordinate between the numerous parties involved in the process and it then consolidated the Land Authority and the Planning Administration under the Finance Ministry in 2015. Estimates are that the planning process has been expedited by 2–6 years, but further gains may be possible by simplifying rules and decentralizing the approval of smaller projects.

24. Further reforms are needed to durably expand supply and improve affordability:

  • Addressing municipal disincentives. Local governments are reluctant to approve residential projects because residential property taxes are well below those on commercial properties even as they require additional infrastructure and public services. The authorities rely on “blanket agreements” with municipalities to overcome these hurdles for major projects. But correcting the incentives would make the supply of housing more responsive to demand on a lasting basis.

  • Ensuring adequate land supply for housing. The majority of the land in Israel is state owned. Accelerating land privatization, focusing on areas of high demand, would help mitigate housing price pressures. Recent efforts to reduce impediments to urban renewal are welcome, and this should be expanded dramatically as urban density in Tel Aviv is relatively low. At the same time, improved public transportation would help relieve demand in major centers. In addition, municipalities could charge taxes on undeveloped privately held land to promote its use.

  • Reducing construction times and costs. The government recently approved six foreign companies to construct residential buildings in Israel to help raise productivity in the sector. This welcome initiative should be expanded over time to allow broader entry of companies, which could also help relieve shortages of skilled labor. Construction costs and the time to build should also be reduced by streamlining building regulations.

25. A more developed rental market would also aid housing affordability. The rental market is primarily small-scale landlords, partly because rental income is taxable for companies but not for individuals. Recent amendments to the laws and regulations for investment in Real Estate Investment Trusts (REIT) are welcome steps to attract professional investment and management into the rental sector, which could in time expand the supply of rental property and moderate rents. Although over a quarter of the population lives in rental dwellings, protection for tenants is among the lowest in OECD countries. Reforms in this area could also aid rental market development.

26. Macroprudential policies are appropriately tight, yet the BOI should continue to monitor developments closely. The BOI has proactively implemented a battery of macroprudential measures in the housing area, both quantitative limits and measures affecting banks’ cost of funding mortgages (Annex IV). As a result, household debt-to-income ratios remain low in Israel and mortgages with LTVs exceeding 75 percent have been almost eliminated. In particular, the requirement for banks to increase capital by 1 percent of outstanding mortgage lending by January 1, 2017 helps account for the rise in mortgage interest rates during 2016. With a view to avoiding an impediment to housing supply—which would have undermined macrofinancial stability—the BOI allowed banks to raise credit supply to the construction sector by recognizing their transfer of credit risk to secondary insurers abroad. This broad perspective on managing macrofinancial risks is welcome and the BOI should continue to monitor property market and debt developments closely.

A01ufig22

Household Debt to Disposable Income Ratio

(Percent, in 2015 or latest available)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: CBS; OECD; and IMF staff calculations.
A01ufig23

New Housing Loans by Loan-to-Value Ratios

(Percent of total new housing loans)

Citation: IMF Staff Country Reports 2017, 075; 10.5089/9781475589269.002.A001

Sources: Bank of Israel; and IMF staff calculations.1/ Loans not secured by housing.

27. The authorities considered that housing market reforms struck a reasonable balance between measures with near- and longer-term effects and noted that macroprudential policy would remain vigilant. The MOF fully agreed that housing supply is the key issue, noting the progress already made by the administrative reforms of planning. The Housing Cabinet had also been effective in addressing impediments to urban renewal and construction financing, and one of its current priorities is addressing skilled labor shortages. Regarding municipal incentives, political obstacles to changing taxes were insurmountable, so they would need to consider other approaches. Construction sector regulation would be reviewed as part of a broader government initiative. At the same time, the full benefits of these supply-side measures would only be realized in the long term. The Buyer’s Price program would provide younger households with affordable housing more quickly and its contribution to supply would become significant in the medium term. As part of the upward pressure on housing prices reflected investor purchases in the context of the current low-yield environment, the MOF considered the combination of tax measures appropriate, noting that some are temporary. Given the high level of housing prices, there are some downside risks in coming years, but recent BOI analysis shows that high risk loans are well controlled. The BOI added that bank capital buffers have increased recently as past measures came into effect, and following their rise, mortgage rates better incorporate the risk associated with mortgage lending, but it would remain vigilant and ready to take actions if needed to protect financial stability.

C. Financial Sector Policies

28. Israel’s banking system is sound but there are concerns about competition and efficiency. Indicators for capitalization, loan quality, and profitability point a healthy banking system. The leverage ratio of 6.6 percent exceeds most advanced economies and loan-to-deposit ratios below 100 percent show limited exposure to funding pressures. However, the system is highly concentrated, with five locally-owned banking groups accounting for 95 percent of banking sector assets, and the two largest groups for over 60 percent of assets (Table 6) Moreover, there have been no new entrants in almost half a century and its cost efficiency is low relative to other OECD countries partly due to high human resource expenses.

Table 1.

Israel: Selected Economic Indicators, 2013–22

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Sources: Bank of Israel; Central Bureau of Statistics; Haver Analytics; and IMF staff estimates and projections.

Percent of potential GDP.

National Accounts data.

Table 2.

Israel: Balance of Payments, 2013–22

(In billions of U.S. dollars; unless otherwise indicated)

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Sources: Central Bureau of Statistics; Haver Analytics; and IMF staff estimates and projections.

Excludes reserve assets.

Table 3.

Israel: International Investment Position, 2008–16

(In percent of GDP)

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Sources: Central Bureau of Statistics; and Haver Analytics.
Table 4.

Israel: Summary of Central Government Operations, 2010–18 1/

(In percent of GDP; unless otherwise indicated)

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Sources: Israeli Ministry of Finance; and IMF staff estimates and projections.

Data as per the MOF definition, on a cash basis, covering the budgetary sector and the National Insurance Institute.

Starting from 2017, grants provided by the United States and associated spending are excluded from the MOF’s budget presentation.

Excludes state land sales.

Registered spending but for which the equivalent cash has not yet been disbursed, hence it does not appear in financing.

In percent of potential GDP.

Table 5.

Israel: General Government Operations, 2010–18

(In percent of GDP; unless otherwise indicated)

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Sources: Central Bureau of Statistics; IMF Government Financial Statistics; and IMF staff estimates and projections.