Israel has been rated with the lowest vulnerability of facing the risk of a financial threat among the emerging market economies by Lehman Brothers but the global investment bank cautioned that political and monetary risks were on the rise.
"Israel is among the countries that have achieved the lowest possible Damocles Index score of zero," according to the firm's Damocles external financial crisis index of emerging market economies. "Its balance of payments - a key component of the index - is 'very healthy.' Israel boasted a near 5% GDP current account surplus in 2006. It also had ample foreign currency reserves and moderate external debt and the shekel has appreciated substantially."
But the investment bank warned that although Israel's fundamentals remained currency positive political and monetary risks were rising.
"The greatest risks appear to be from renewed political instability in the wake of the Winograd Report, steadily falling nominal interest rates, pent-up demand for foreign assets from the household sector and, of course, geopolitical factors," the broker said.
At the same time, Lehman forecasted that as fundamentals remained conducive the shekel was expected to appreciate further in the coming year.
The Damocles financial crisis index is a proprietary early warning system that helps to identify the risk and vulnerability of a financial crisis in emerging market economies.
According to the findings of the index, Israel was joined by Colombia, Chile, Argentina, Peru and Singapore as the least likely emerging markets economies to be facing external financial threat that could cause local collapse. Iceland and Romania were the most vulnerable among the 25 emerging market economies facing a financial crisis.
In a separate report, Haim Israel, senior analyst at Merrill Lynch, predicted that liquidity in Israel would continue to rise and further boost the the country's capital markets in the coming years on the back of sharp declines in government issuance, a low interest rate environment and structural reforms ahead.
"We believe that households will lead the charge in the Israeli equity market in the coming years," Israel wrote in a research note. "Lower fixed-income returns and strong market performance three years in a row are likely to entice retailers into the equity market."
In addition, redemption of government designated bonds, which started in 2004 are expected to come to a peak in 2007.
"The government is significantly lowering its fundraising through the market due to low deficit and inflows into pension funds and insurance companies, therefore, are looking for a new home," he said, estimating that net inflows to the capital market of NIS 22.5 billion, of which around 25% will go into equities, in three months.