Business sentiment falls sharply as hostilities persist

ISRAEL - In Brief 12 Nov 2023 by Jonathan Katz

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Geopolitics: Israel’s ground operation into Gaza continues, as do sporadic missile fire into Israel from Gaza, although at a decreasing pace. The Israeli army is consolidating its control on northern Gaza and is proceeded slowly to deal with the massive tunnel network especially in Gaza city (including underneath hospitals). International pressure for a cease-fire is mounting as civilian casualties and suffering increases. Israel has agreed to 4 hour a day pause in the fighting to allow for humanitarian aid. Sporadic low-level fighting with Hezbollah continues. Economic data: The Business Tendency Survey in October points to a sharp contraction of activity in all sectors, especially construction. The high-tech service sector is still reporting expectations for modest growth in exports and employment. Despite opening of more shops and schools, the real time data regarding credit card purchases for the last week reflects only minor improvement. October’s fiscal deficit surged to 22.9bn ILS from 3.1bn last year as both defense expenditures expanded and tax revenues declined. The fiscal deficit in the last 12 months is still a low 2.6% GDP but is expected to reach 4% this year and a higher 5.5%-6% next year. FX: Last week the shekel appreciated by 2.8% against the basket of currencies (by 2.9% against the dollar and by 2.6% against the Euro). Expectations for a limited war in Gaza has fueled this Shekel rally, but this could change at any moment. The BoI sold 8.2bn USD in October (out of the current 30bn program) to slow shekel weakening. In September Israeli institutions purchased 0.5bn USD (net), purchasing assets abroad of 0.7bn while reducing their FX hedge by 0.2bn. I...