Governor Yaron appears satisfied by the fiscal adjustments

ISRAEL - In Brief 22 Jan 2024 by Jonathan Katz

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Politics/fiscal: The government approved a 16bn ILS fiscal adjustment plan for 2024, with higher taxation in 2025. The fiscal trimming in 2024 includes a 5% across-the-board fiscal cut, a higher cigarette tax and other measures. The Defense budget will increase by an additional 55bn. The Bank of Israel appears satisfied by this scheme although they were in favor of an immediate 1% hike in VAT (instead of in 2025). The BoI Research department is currently forecasting a fiscal deficit of 6.5% GDP this year, slightly below the official 6.6% target. Inflation: December’s CPI declined by 0.1% (3.0% y/y) with core inflation down to 2.7% y/y (from 2.9%). Looking at the major categories: core goods slowed to 0.1% y/y from 0.3%, rental prices slowed to 3.1% from 3.6% and non-rental services to 3.8% from 4.2%. We expect inflation to reach 2.7% in 2027. We see four drivers of higher inflation: Higher shipping costs from Asia, accelerating rental prices in 2H24, a mini pent-up demand surge as the war ends, and a weaker shekel on internal political rift and weakening fiscal credibility. • The approved 5% increase of the cigarette tax and VAT on digital services (Netflix) are expected to contribute 0.15% to inflation. 1% VAT hike in 2025 will contribute about 0.5% to inflation. FX: The shekel appreciated by 0.9% in the last two trading days of last week, impacted by both positive equity markets abroad and Governor Yaron’s assessment that the fiscal adjustments approved are significant. Despite the war, the hi-tech sector raised 1.5bn USD abroad in Q4 following 1.6bn in Q3, and 7bn in all of 2023 (compared to 16bn in 2022). The Bond Market: The MoF raised 855ml Euro abroad (650ml to ...