· The economy continues to grow at a pace that is in line with its potential growth rate. The unemployment rate continues to decline, and employment security is high. Inflation is below the lower bound of the target range. Credit ratings agencies have confirmed Israel's high rating, and noted the contribution of high-tech to economic growth, the economy's ability to withstand shocks, and the low external debt to GDP ratio as considerations supporting their decisions. However, weaknesses were also noted. The government deficit is higher than the target, and the political-government situation makes it difficult to make necessary fiscal changes. In addition, the forecasts for continued growth in the reviewed period were revised downward, in parallel with similar revisions abroad by the major international institutions.
· The developments in asset prices in Israel continue to show a medium risk level in this channel. The risks in the equities market in general are below the long-term average. In the corporate bond market, there are signs that risks are being under-assessed. Despite the increase in home prices in recent months, indicators in the housing market do not indicate volatile behavior.
· The risk to financial stability from the credit channel remains unchanged at a medium-to-high level. The business sector debt to GDP and debt to business output ratios remain virtually unchanged, while the financial system continues to increase its exposure to housing credit, which is a significant component of the Israeli banks' balance sheets, and to nonhousing credit from the nonbank channel. The concentration of the Israeli financial system, and the slower pace of financial development in Israel, still do not allow for a greater diversification of risk between different participants as is common abroad. An analysis of the likelihood of bankruptcy shows that the risk level of public companies remains stable and low from an historical perspective.
· Liquidity risks in the financial markets and in firms remains at medium intensity. Data from the second half of the year show some improvement in the level of liquidity in the financial markets, even though from an historical perspective, liquidity in most financial asset markets in Israel remains low.
· The connectedness of the domestic financial system remains medium-to-low. Direct exposure among the financial institutions in Israel shows a mixed trend, with institutional investors' exposure to banks increasing, and mutual exposure between the banks, and between them and the institutional investors and foreign financial institutions declining. In contrast, indirect exposure, meaning financial institutions' exposures to joint third parties, is again increasing.
· In view of technological and regulatory developments, the number of participants in the payments and settlement market is expected to continue growing, which is expected to increase the variety of payment possibilities both for payers and for payment receivers. In addition, as the number of participants and the use of new means of payment increase, operational risks and exposure to fraud also increase. Supervision of this activity is less tight than it is for banking corporations, but it is being increased. In the meantime, the volume of less-supervised activity is relatively small.
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