For more than 20 years Israel’s economy has demonstrated continued strength, growth and stability. Despite many internal and external challenges emanating from its unique position, Israel has evolved into the “Start-up Nation” of technological innovation, with a strong local currency, an active local economy and robust export industries.
The growth of the Israeli economy has picked up in 2016, and it is forecasted by the OECD that growth will continue and reach 3.25% in 2017 and 2018. This rate reflects an increase in local demand, against a lower rate of growth of exports, influenced by the overall weakness of the global economy and the strength of the shekel.
Innovation and technology
In the innovation and technology spheres, the “Start-up Nation” remains active and growing. Indeed, Israel is widely celebrated as a centre of technological excellence. As a result, Israel now appears on the radar of many leading international companies who closely track trends evolving in Israel with an eye to investing in and acquiring innovative technology. Cybersecurity, automotive technology, fintech and the internet of things (IOT) are expected to continue and attract significant non-Israeli investment well into 2017.
The local hi-tech economy is greatly influenced by global trends. In 2016 international interest in Israeli technology remained strong, as reflected by the volume of international investments and acquisitions of Israeli-based tech companies and by the continued presence of more than 200 development centres of multinational top-tier corporations.
Traditionally, it was US companies that led the way in making investments in Israel. In recent years Europe has begun to catch up. The last two years have witnessed substantial investment from China and Japan, a trend that will most likely continue throughout 2017.
The local technology ecosystem continues to expand, branching out from the traditional centres in Tel Aviv, Haifa and Herzliya, to Jerusalem, the Galilee and Be’er Sheva. This has led to the creation of numerous working spaces, accelerators, incubators and early stage funds. Many international companies have decided to invest in incubators and accelerators as a way of spotting future stars with original ideas and technology. Major financial institutions sponsor such developments, recognising the potential opportunities to their own businesses.
The Israeli government endeavours to support the technology ecosystem. 2016 saw the introduction of an important amendment to the R&D Law, easing the rules governing technology transfer and establishing a new National Authority for Technological Innovation (NATI), replacing the Office of the Chief Scientist (OCS). New relevant tax rules are considered and are expected to come into effect in 2017. Matters under consideration include treatment of intellectual property held by multinational companies, cross-border transfer pricing, taxation of online-based businesses, and treatment of “reverse vesting” mechanisms.
Offshore gas and infrastructure
The commercialisation of the Israeli offshore gas fields has seen some recent significant developments. Following the decision of the Israeli Supreme Court, in May 2016 the Israeli Government adopted an amended regulatory framework for the exploitation of offshore gas fields. The framework puts into place competition, price control and taxation exemptions, and offers long-term legislative stability. The new framework is expected to break the impasse that has held back the commercialisation of Israel’s natural gas resources.
The Tamar gas field already supplies the local market with a substantial part of its energy requirements, while the larger Leviathan field is likely to come online within a year. Certain international energy companies are following the recent developments, as questions regarding the export of gas from Leviathan remain unanswered. In addition, the government is tendering new Mediterranean oil and gas exploration concessions, to be granted in 2017, and new consortiums are currently negotiating in anticipation of these opportunities.
In addition to the gas sector, Israeli infrastructure continues to develop. Various transportation and energy projects are underway, including the first light railway line in the greater Tel Aviv metropolitan area, pumped storage hydro energy and solar projects in the Jordan Valley and the Negev Desert, and the Tel Aviv–Jerusalem train line, to name a few. Though the tender process in Israel may be lengthy, the large number of pre-qualified foreign bidders is both validation and vindication of the government strategy to dramatically upgrade the country’s ageing infrastructure. It is expected that additional tenders will be published in 2017, particularly in the transport sector.
Investments and capital markets
Israeli technology and other companies continue to attract local and international investors, ranging from early stage angel investors through to venture capital and private equity funds. As the global IPO markets remained unwelcoming in 2016, Israeli companies seeking an exit set their sights on M&A and private equity transactions. A change in the US public markets in 2017 may also impact the local trend.
The Tel Aviv Stock Exchange (TASE) is struggling to keep in time with the evolving economy. In 2016 the number of traded companies and the trading volumes on TASE continued to drop. Easement of requirements, introduced by the Israeli Securities Authority (ISA), together with various trading changes, are hoped to revive the local public equity market in 2017.
Regulation by the ISA of “Trading Platforms to Their Own Account” came into full force in 2016. Initially, the regulating powers were limited to online forex, binary option and CFD trading offered to the Israeli public. However, the conduct of the large Israeli online trading industry operating in non-Israeli markets has been drawing attention and criticism. This attention may lead in 2017 to an extension of the ISA’s regulatory powers to these local-based but international-only facing companies.
The continuing rise in the housing market remains a contentious topic, on the public, political and economic fronts. It is to be seen if in 2017 government-sponsored construction, the opening of the market to non-Israeli construction companies, and new taxation for investors in residential projects, together with a rise in mortgage rates, will reverse the trend and stabilise housing prices.
Another issue on the local economic agenda for 2017 is the long-awaited implementation of the measures to increase competition. These measures were brought into legislation in 2013, through the Law for Promotion of Competition and Reduction of Concentration, which was adopted following the 2011 “social protest”. Though the final target date for diversification has been set for 2019, it is anticipated that in 2017 certain of Israel’s holding companies will commence the disposition of certain financial and non-financial assets, to conform to the requirements to eliminate concentration of assets and to break down pyramid holding structures. These disposals are expected to be of interest to foreign buyers – particularly the sell-off of certain financial businesses.
Local legal environment
The strong economic conditions and vibrant business climate continue to affect the local legal environment. The continuing international interest in Israeli companies, assets and technologies, the complex infrastructure projects in planning and under construction, and the ever complicated regulatory environment require local law firms to continue to broaden their capabilities. Although Israel has a large per capita concentration of legal professionals, the competence required to service cross-border clients is reserved to a smaller circle of law firms with an international mindset.