International recognition of a Palestinian state is gathering momentum, a trend that will continue over the next decade and deepen Israel's diplomatic isolation. However, actual statehood remains a far-off prospect.
The dissolution of the Palestinian unity government in June 2015, followed by President Mahmoud Abbas' resignation from the chairmanship of his political faction in August, point to a growing governance vacuum in the West Bank and Gaza. The risk of a comprehensive collapse of the Palestinian political system is increasing, amidst a stagnating economy and the multitude of challenges confronting the Palestinian leadership. Tensions between the rival Palestinian factions will remain high, preventing the reconstruction of the Gaza Strip and fuelling political instability.
Elevated political risks, a continued decline in competitiveness, and an overreliance on debt amidst shrinking donor disbursements all present constraints to the Palestinian territories' economic outlook. In our baseline scenario, which assumes no major change to the political situation, growth will reach 3.6% this year, compared to an annualised 5.7% between 2010 and 2014.
Israeli-Palestinian peace talks resumed in August 2013, but failed to progress past their April 2014 deadline. We retain our view that despite efforts by US Secretary of State John Kerry, the current political configuration in Israel, combined with the increasing fragmentation of the Palestinian governance system, will hinder any progress in negotiations.
The wave of violence raging across Israel and the occupied West Bank since October 2015, aside from its negative implications for the Israeli economy, underscores the growing crisis of legitimacy faced by the Palestinian leadership. Although not our core scenario, the danger of a third intifada is growing and constitutes one of the main risks for the broader region over 2016.
Any sustained punitive economic measures imposed by Israel that further constrain exports and imports, or disrupt governmental revenue flows, would pose downside risks to our forecasts for growth and the government budget.
Popular discontent, either with Israel or the lack of progress among Fatah and Hamas, could lead to social unrest and thereby undermine the growth prospects of the West Bank and Gaza, and weigh on the territories' political risk profile.
|Real GDP growth, % y-o-y||-0.4||3.4||3.6||3.9|
|Nominal GDP, USDbn||12.8||13.9||14.8||15.8|
|Consumer price inflation, % y-o-y, eop||0.7||1.0||2.5||3.0|
|Exchange rate /USD, eop||1.00||1.00||1.00||1.00|
|Budget balance, % of GDP||3.2||-1.0||-1.0||-0.9|
|Current account balance, % of GDP||-10.9||-13.5||-12.8||-15.0|
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