LDN - Business

Teva Pharm woes seen denting Israeli exports, economic growth

[December 18, 2017] By Steven Scheer

JERUSALEM (Reuters) - Israel's export-dependent economy is expected to take a hit from planned job cuts and plant closures at its largest company, Teva Pharmaceutical Industries <TEVA.TA>, but overall growth should stay strong.

Teva <TEVA.N>, the world's largest generic drugmaker, accounts for as much as 3 percent of Israeli economic output, according to economists. Teva, along with Israel Chemicals (ICL) <ICL.TA> and Intel's <INTC.O> Israel plants, accounts for close to half of industrial exports.

As such, Teva's announcement that it planned to slash its global workforce by a quarter, or 14,000 jobs -- 1,700 of those in Israel -- has caused concern, especially since ICL and Intel's exports have slipped in recent years.

"We intend to reduce our (Israeli) export and GDP forecasts for next year," said Bank Leumi chief economist Gil Bufman. "In terms of GDP, it will mark down forecasts in 2018 by 0.3 percentage point. But it won't completely derail the economy."

Israel's economy is poised to grow around 3 percent this year and economists had expected a faster rate of at least 3.5 percent in 2018. But Bufman believes it will be between 3 and 3.5 percent.

Over the first 11 months of 2017, pharmaceutical exports -- which are mostly Teva -- rose to $6.8 billion from $6.3 billion in the same period in 2016, although monthly pharmaceutical exports have slipped by 40 percent since peaking in August, government data showed.

Not only will Israel's exports be reduced by plant closings, Teva also sells to the domestic market and there is a multiplier effect of smaller companies selling to Teva, economists noted.

Exports make up more than 30 percent of Israel's economic growth, but industrial exports excluding diamonds -- $44 billion in 2016 -- have shrunk to around 16 percent of that.

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Worker of Teva Pharmaceutical Industries block a road during a demonstration near the facility in Neot Hovav, southern Israel December 17, 2017. REUTERS/Amir Cohen

Fast-growing services such as those in the high-tech sector, which provide more added value and are less dependent on currency effects, are 14 percent of Israeli exports.

Even before the mass-layoffs were announced, financial woes at Teva worried policymakers at the Bank of Israel. Minutes of an Aug. 29 rates decision showed that committee members discussed developments at Teva.

"The developments won’t create a macroeconomic impact in the short term, but in the long term there will likely be some negative impact on exports and on GDP," the minutes said.

One potential silver lining for Teva, economists said, is that most of its laid-off employees in Israel would ultimately find new jobs. Between September and November, the number of job vacancies jumped an annualized 13.8 percent, based on trend data issued by the Central Bureau of Statistics on Sunday.

With a jobless rate of 4.1 percent in the third quarter, Israel's labor market is deemed at or close to full employment -- but with excess demand for labor.

"The economy is poised nicely to absorb most of these workers that are laid off," said Jonathan Katz, chief economist at Leader Capital Markets. "So the impact on the general growth picture should be minimal."

(Reporting by Steven Scheer; Editing by Raissa Kasolowsky)

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