Global investment houses UBS and Morgan Stanley on Wednesday praised the resilience of the local economy, expressing confidence in its strength to weather geopolitical constraints.
"The Israeli economy has shown impressive resilience over the recent months," said UBS in a report on emerging markets as it raised its 2007 growth forecast for Israel's economy to 4.3 percent from 4%. The Bank of Israel recently raised its forecast to 4.6%.
"Israel has a strong balance of payments, strong shekel and low inflation, with more interest rate cuts likely," said UBS.
Similarly, Morgan Stanley praised the country's economic achievements, in particular regarding the current account surplus figures.
"The current account surplus is not just a cyclical phenomenon," said Serhan Cevik, analyst at Morgan Stanley Research Europe. "The country's current account balance moved from a deficit of 0.5% of GDP in 2002 to a surplus of 2.9% in 2005 and 6% last year thanks to the increase in hi-tech exports and net income from investments abroad. This is an amazing performance considering the worsening in the country's terms of trade because of higher commodity prices."
Cevik added that the shekel's appreciation was not just about the dollar's weakness.
"The dollar's weakness may have been a trigger, but the shekel's appreciation is certainly not just about what has happened to the dollar, and reflects the improvement in Israel's economic fundamentals."
Both firms also maintained that the shekel was not overvalued.
Given UBS's bearish house view on the US dollar, and our bullish outlook on Israel's balance of payments, we expect the shekel to strengthen even further," UBS said. "We forecast another 50 basis points of rate cuts by the Bank of Israel in 2007."
The shekel closed at 4.2490 against the dollar on Wednesday.