External fundamentals appear less shekel supportive

ISRAEL - In Brief 12 Mar 2023 by Jonathan Katz

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The goods/services surplus declined in Q422 Although the headline current surplus improved in Q422, the more important breakdown of good/services account reflect a declining surplus to 3.4bn USD in Q4 from 3.9bn in Q3. FDI into Israel surged in Q422 to 9.4bn USD compared to 6.8bn in Q3. 2023 will most likely witness a sharp decline due to the global slowdown in hi-tech investments. The recent collapse of the Silicon Valley Bank will certainly provide further headwind for the hi-tech sector. Bottom line: macro fundamentals are likely to be less shekel supportive going forward. The shekel will continue to react more to global equity movements and the developments regarding the judicial measures. Tax revenues continue to contract February witnessed a seasonal fiscal surplus of 2.7bn ILS (4bn surplus last year). Tax revenues were down by 3.9% y/y in real terms at constant tax levels and are down 8.4% y/y in January-February. Non-Covid expenditures were up 6.9% y/y in Jan-Feb. We continue to see a higher deficit this year (3.5% GDP) than planned (1%) under the assumption that tax revenues will contract further on slowing growth, and contraction of capital gains and real-estate taxes. The MoF budget assumption of tax revenue stability in 2023 is overly optimistic. Politics: Massive demonstrations continued nationally on Saturday evening with a reported 200k participants in Tel Aviv. President Hertzog stated that a compromise is possible on most issues but meanwhile the coalition continues to push forward with the original judicial measures severely restricting the independence of the judicial authority. FX: Last week, the shekel appreciated by 2.2% against the basket of curr...