Fiscal deficit likely to reach 10% GDP, below expectations

ISRAEL - In Brief 09 Aug 2020 by Jonathan Katz

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Highlights of the Weekly Israeli Macro Wrap Up 10.8.20: Uncertainty is high regarding budget approval: whether to approve the 2020 and 2021 budget separately (as Netanyahu wants) or jointly in one framework (as stipulated by the coalition agreement. This disagreement, if it is not settled by August 25th (the deadline for the 2020 budget approval), will result in early elections towards end-year. In such a scenario, we envision one or more rating agencies pushing Israel’s outlook to negative from stable. Recent economic data point to modest PC growth in July: Domestic VAT collection is down only 1.3% y/y in January-July. Credit card purchases on average increased by 1.6% in July. The Google Mobility Index points to some stability in July. Production of electricity (weather adjusted), is up 2% y/y in July. The BoI Composite Index remained stable in June. On the other hand, the business tendency survey points to increasing pessimism (net negative orders). The fiscal deficit reached 7.2% GDP in the last 12 months: Non-Covid expenditures are down 0.4% y/y in January-July. Only 38% of additional earmarked expenditures for Covid have been actually spent. Taxes are down 6% y/y YTD, but income taxes are actually up. We see the fiscal deficit reaching 10% GDP this year, below the 13% BoI/MoF forecast. FX: The BoI purchased 0.8bn USD in July which stabilized the shekel against the basket. Israeli institutions were net sellers of FX in June by 0.6bn USD. The bond market: The Bank of Israel purchased “only” 0.5bn ILS of government bonds in July (and 0.6bn of corporate bonds), following 23.4bn from March-June. The BoI does not appear too keen on pushing yields down aggressively. Cov...