Israel’s country risk environment has weakened over recent weeks as a result of worrying ongoing developments, especially in the political arena. Efforts by Foreign Minister Tzipi Livni to form a governing coalition to take over from the administration of outgoing Prime Minister Ehud Olmert failed in late October after she refused to accommodate demands made by the ultra-Orthodox Shas party to rule out future negotiations with the Palestinians over the status of Jerusalem, and Shas’ request for a significant uplift in public expenditure on welfare. As a result, Livni was forced to advise President Shimon Peres to call a general election. Peres duly set in motion procedures for the holding of a national vote: as part of this, parliament had three weeks from end-October in which to dissolve itself and set a date for a poll; all the indications are that the vote will take place on 17 February. Interestingly, Livni’s reputation as being free of corruption appears to have had a positive impact on her Kadima party’s opinion poll ratings, with some polls putting Kadima on more or less the same level of support as its main rival, the right-wing Likud, headed by former premier Benjamin Netanyahu. This represents something of a turnaround for Kadima, which until recently had consistently trailed Likud. Despite this, however, it is still the case that even if Kadima is successful in February, Livni is still likely to be faced with the same difficulties in forming a sustainable coalition. 

Given all the delays that have accompanied Olmert’s departure and the search for his successor, the peace process has inevitably suffered. Peace negotiators not only have to deal with politically-induced delays on the Israeli side, but the election of a new president in the US is also hampering efforts. The situation forced Palestinian President Mahmoud Abbas to indicate in early November that he thinks there is now no chance of a peace deal being reached before the end of 2008; outgoing US President George W. Bush’s hope that a settlement might be in place by the time he leaves office at end-January is also looking highly unlikely. Indeed, with the new US president needing a few months to settle into the post, D&B believes that any progress in the peace talks is unlikely to take place, if at all, until the second half of 2009. 

Finally, on the economic front, the Israeli economy appears to be in a reasonably good position to weather the worst of the global financial crisis. Granted, contagion effects will mean that real GDP in 2009 will be lower than previously forecast, at 2.7%. However, in an effort to bolster domestic confidence, the central bank cut interest rates by a cumulative 75 basis points in October, a move that will help  strengthen domestic liquidity without adversely impacting on inflation, which should trend down anyway in the months ahead. Meanwhile, the bank reported in early October that the domestic banking system is in relatively good order.