Regional politics may impact financial confidence

Israel has sustained conflicts well but that could change, Citigroup analyst warns.

The Tel Aviv Stock Exchange. (photo credit: Bloomberg)
The Tel Aviv Stock Exchange.
(photo credit: Bloomberg)
Israeli financial markets have proved remarkably resilient to regional political crises in recent years, but there are scenarios for Egypt that might increase the local markets’ sensitivity to regional politics, investment bank Citigroup warned Monday.
“Israeli markets have not bothered too much about regional politics since 2002,” Citigroup analyst David Lubin said in a report. “However, we think that regional events could become a much bigger factor influencing Israeli financial confidence, particularly given the flow of news recently from Lebanon. And if the region’s unrest were to spread to Syria, where the Islamist opposition has some parallels with that in Egypt, Israeli confidence could be shaken further.”
Similarly, analysts at UBS investment bank said Monday the recent developments in Egypt potentially have geopolitical implications for Israel.
“While we believe the Israeli economy will remain largely unaffected, international investors could attach a higher country risk going forward until the situation has resolved,” UBS analysts Daren Shaw, Roni Biron and Ziv Tal said in a report on Israel.
“The peace with Egypt has largely enabled Israel to enjoy relative quiet on its Southern border and a close relationship with one of the most senior members of the Arab league. Given Israel’s complicated geopolitical landscape, we believe that any fundamental change in Egypt presents a potential risk for Israel.”
UBS praised Israel for being one of the top performing economies in the OECD.
The local economy should grow 3.8 percent this year and 4% in 2012, it said.
“We note that much of the TA-25 are large global companies and are unaffected by events in Israel,” the report said.
“During the past five years the Israeli market has managed to successfully sustain conflicts in Lebanon and Gaza, as well as the global downturn, while significantly outperforming some of its OECD peers.
“We attribute much of this sustainability to conservative monetary and fiscal policies in recent years, the export-oriented nature of the economy and its stable and liquid banking system.”
Citigroup’s Lubin said efforts by the Bank of Israel and the Finance Ministry to impose controls on capital inflows over the past two weeks seem redundant now. Over the past two weeks, measures were announced to limit speculative capital inflows and weaken the shekel: imposing an unremunerated reserve requirement on foreign-currency forwards and swaps; and announcing a suspension of foreigners’ exemption from withholding tax on fixed-income securities.
“Partly due to the impact of these measures, the shekel has depreciated by nearly 10 percent in trade-weighted terms during January,” he said. “But it remains stronger than its level as recently as July 2010. If the news flow from the region remains negative, Israeli financial markets may rediscover their 2002 sensitivity to regional politics.”