Huge fiscal surplus in January due to weak spending and strong revenues

ISRAEL - In Brief 09 Feb 2020 by Jonathan Katz

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Highlights of our weekly macro review: January witnessed a huge fiscal surplus of 5.9bn ILS The LTM deficit declined to 3.2% GDP, from 3.7% in 2019. This is due to the lack of an approved budget reducing spending. In addition, taxes revenues surged on one-off jump in car purchases. VAT purchases remain robust, an indicator of strong domestic demand. The next government is expected to consolidate due to large fiscal demands on the budget and previous government commitments. We assume taxes will move higher (VAT as well) contributing 0.4% to inflation.Business sector sentiment remains elevated, suggesting steady growth into Q120.Incoming tourism increased by 12.9% y/y in January. Chinese tourists make up only 3.4% of total, but some slowdown is expected from weaker global tourism.Average wages increased by an annual pace of 2.8% towards end-2019, mostly due to private sector wage pressure.Consumer optimism remains high, with the Poalim confidence index up 1.1 points in December-January.The BoI purchased 2.95bn USD in FX market in January, but nevertheless, the shekel appreciated by 1.3% against the basket. Monetary policy: We still maintain our rate hold forecast for this year. Strong FX intervention in January underlines this main policy tool.Politics: The latest polls still point to a deadlock between the left-center block (59 seats) and the right-wing block (53 seats), with Lieberman still the tie-breaker (8 seats). The left-center block has strengthened by about two seats, but this is not enough to reach the 61-threshold necessary to form a coalition. A fourth election round cannot be ruled out, if Netanyahu refuses to step down, Lieberman remains on the fence...