Government bond issuance expected to increase

ISRAEL - In Brief 14 May 2023 by Jonathan Katz

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We expect the fiscal deficit to reach 2.4% GDP this year This assumes further contraction in tax revenues in 2H23. According to our fiscal financing projection, bond issuance will gradually increase from 1.35bn per week in May to 2.0-2.25bn. The bond market should be able to absorb this increase, as bond redemptions in June-December (55bn ILS) will equal bond issuance. The bigger question will be the fiscal outlook for 2024, assuming growth remains below potential and fiscal spending continues to expand. GDP growth in Q123 expected to reach 1.8% GDP GDP growth will be impacted by modest private consumption growth, residential investments, and modest export growth (relative to imports). Headline GDP growth will be weak due to the decline in new vehicle imports which surged in Q422 (before higher taxation kicked in). Taxes on imports are factored into total GDP growth. Excluding taxes on imports GDP growth is expected to be 2.0%-2.5%. FX: the shekel appreciated (against the basket of currencies) by 0.5% last week despite the escalation of violence. We could envision the shekel appreciating further following the cease-fire and fading expectations for a unilateral judicial overhaul. In March, Israeli institutions purchased net 3.5bn USD, increasing their FX exposure to 18.8% from 17.8%. The bond market: The 10-year bond differential vis-à-vis the US T-bills has gradually declined in the past few weeks to 0.1%. Assuming the judicial legislation issue slowly disappears and the shekel appreciates, we should also see a further positive momentum in the bond market. S&P reaffirmed Israel’s AA- rating with a stable outlook. The announcement did stress the downside risk of a unila...