Shekel weakness likely to continue without a reasonable compromise regarding the judicial measures

ISRAEL - In Brief 26 Feb 2023 by Jonathan Katz
Israeli macro highlights 27/2/23 The main issue impacting markets recently has been the judicial measures pushing forward in the Israeli Knesset. Part of these reforms were voted upon last week (1st vote out of three) and further progress on this legislation is expected this week. So far, no real dialogue for reaching a compromise with the opposition (or the President) appears to taking place, at least not officially. The Chief Economist of the MoF warned that Israel’s growth potential could be impacted if the independence of state institutions is curtailed and foreign investments slow. FX: The immediate impact has been on the shekel, which weakened by 2.4% against the basket of currencies last week and by 3.6% in February. We expect pressure for shekel weakening to continue unless a reasonable compromise regarding the judicial measures is reached. We assume that the major Israeli savings institutions are increasing both their investments abroad and their FX exposure. Inflation: The impact of a weaker shekel is expected to push inflation higher. With the FX pass-through estimated at 0.1%-0.15% for every 1% depreciation (if not more), we currently expect inflation to reach 3.6% in NTM, assuming only a modest shekel weakening to 3.75 ILS/USD. Although on the demand side, consumer demand will slow due to higher inflation, shekel weakness and higher rates, this will not offset the impact from the supply side. In addition, public sector wage increases should provide some support for private consumption demand. Recent economic indicators point to deceleration. Hi-tech service exports declined by 5.7% m/m in December and by 6% saar in Q422. Manufacturing exports contracted by...

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