Fiscal deficit likely to reach 8%-9% GDP this year

ISRAEL - In Brief 30 Mar 2020 by Jonathan Katz

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The fiscal deficit is like reach 8%-9% GDP this year. We are taking into account the following assumptions: Israel was running an underlying deficit of around 3.0%-3.5% before the crisis, if we ignore the demands and past legislation which would have pushed this deficit even higher. This additional expenditure pressure (public sector wage agreements, higher stipends for the disabled, etc) will clearly be postponed for some time. An underlying deficit of 3% is 45bn ILS.The government is currently hammering out a fiscal package. While the details are not finalized, we assume it will reach 60-80bn ILS, but part of this will be the postponement of tax payments and government guaranteed loans which will not be fully reflected in the annual deficit. We assume about 40-45bn ILS will impact the deficit.Tax revenues will clearly decline on negative growth. We assume a 5% annual contraction in GDP growth (clearly much deeper in Q220, followed by a modest and gradual improvement in Q3 and Q4. Tax revenues are likely to decline by a sharper 10% (firms going bankrupt, higher unemployment, lower real-state activity, etc) or by 35bn ILS. This assumes the economy opens up gradually by June.So, we are talk about a fiscal deficit of around 120-125bn ILS or 8%-9% of GDP.How will this be financed? A small amount will be financed by net issues abroad and some sale of government land (privatization), together making up a net amount of 5bn ILS.The Ministry of Finance is expected to utilize about 20bn from excess reserves (from strong issuance in previous years, above financing needs). So, we expect the net domestic issuance to reach 100bn ILS (above capital redemption). The BoI will be purch...