Central Bank Warns Israel More Vulnerable to Global Downturn

Report cites growing business and household debt, increased appetite for risk

Bank of Israel Governor Karnit Flug.
Emil Salman

The risk of a reversal in global financial markets has grown due to a deteriorating world political situation, as has the danger that Israel could be swept up in a global downturn amid rising business and household debt, the Bank of Israel said in its semi-annual financial stability report.

The report, released on Monday, pointed to higher liquidity in global markets that signaled growing imbalance and more risk. Meanwhile, the United States faces multiple political problems that could evolve into crises, especially vis-a-vis North Korea, Russia and trade tensions with China, the report said.

Internally, the U.S. is suffering a raising national debt, government paralysis and bitter partisan rivalry, said the report, which covers development in the financial markets for the second half of 2017.

Israel was relatively unaffected in past crises – most notably the 2008 global downturn – but in 2018 the economy is much more leveraged than in the past amid growing levels of long-term borrowing by businesses and households. The report said that low market volatility has increased liquidity and risk.

According to the report, historically low interest rates – the Bank of Israel’s base rate has been at a record low 0.1% since 2011 – have made investors more willing to accept higher levels of risk in the hopes of getting better returns from their investments.

Borrowing boom Consumer lending, billions NIS

“The housing market, household leverage and the asset market are the main areas where we identify exposure to risk for the Israeli economy. The parameters examined in this report show that the level of the exposure to the housing and asset markets remained medium-high during the reviewed period, and that the intensity of exposure to consumer credit remained medium,” the report said.

The Bank of Israel report pointed to the housing market as the chief risk factor for the economy amid what it said was uncertainty over housing demand while the level of supply is falling, as evidenced by the 11% decline in housing starts in the first nine months of 2017.

The central bank warned that if home prices were to fall quickly and sharply, households would reduce spending and investment in construction would shrink, as would spending on consumer durables – declines that could reverberate throughout the economy.

The report also offered an alternative scenario in which potential home buyers, who have been waiting to make a purchase with government programs like the Mechir L’Mishtaken (Buyer’s Price), will eventually that realize prices aren’t coming down and return to the market, causing prices to resume rising.

Moreover, with the global economy improving and financial markets abroad more stable amid declining volatility, the short-term risks to Israel’s banking system originating abroad declined in the second half of 2017, the central bank said.

It also pointed out that the low-interest rate cycle had reduced the costs of financing and made it easier to service debt.