The BoI signals that fiscal policy is an increasing concern

ISRAEL - In Brief 10 Dec 2023 by Jonathan Katz
Geopolitics: Israel is continuing its ground offensive into the more southern part of Gaza, while missiles into Israel continue but have declined sharply. Sporadic low-level hostilities continue in the North. Domestically, most limitations on activity in Israel have been lifted, except for sports events and some cultural events. FX: Last week, the shekel appreciated by a sharp 1.5% against the basket of currencies and is 2.6% stronger than pre-war (compared to October 6th). In October, Israeli institutions were net FX purchasers of 0.9bn USD, increasing their exposure to foreign assets to 34.6% from 32.9% last month. Their FX exposure share increased only to 20.3% from 19.9% as they increased their FX hedging by 1.5bn USD. In November, the BoI sold 0.3bn USD in the FX market following 8.2bn in October. The fiscal deficit is up to 3.4% GDP LTM to November. So far this year, expenditures are up 13.2% y/y and revenues are down 6.2% y/y. We expect the deficit to reach 4.2% GDP this year and 5.7% in 2027. Monetary policy: Monetary caution is expected to continue unless the government releases a credible fiscal consolidation scheme for 2024 and beyond. The adjustments to the remaining 2023 budget are regarded as disappointing. The Bank of Israel appears increasingly concerned regarding fiscal policy going forward, both regarding the impact on fiscal credibility and the shekel, as well as on inflation, as stated both in the monetary decision and macro forecast. We doubt rates will move lower on January 1st, but we will have to see November’s CPI print first. We currently expect policy rates at 4.0% by end-24. The bond market: The bond market is pricing in rather aggressive lo...

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