A dent in fiscal credibility could postpone loosening

ISRAEL - In Brief 03 Dec 2023 by Jonathan Katz

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Geopolitics: Following the return 116 hostages, negotiations broke down in receiving the remaining 136 hostages. Israel renewed its offensive and Hamas fired missiles into Israel. Hezbollah fired as well and Israel retaliated. It is not clear whether this renewed pressure will result in the resumption of hostage deals or not. Israel is determined to continue its offensive into Southern Gaza. Fiscal policy: The cabinet approved an additional spending of 30bn ILS for the cost of the war and reparations in 2023. The government reduced only 1bn of the remaining 2.5bn ILS allocated expenditure from coalition agreements from the 2023 budget. No decision has been reached regarding these allocated funds in the 2024 budget (for the ultra-orthodox and right-wing parties). Although the recent decision for the remaining 2023 budget is not that significant, the reluctance of Netanyahu to go against his coalition partners could shake fiscal credibility into 2024 and beyond, as fiscal consolidation will be necessary to finance additional defense spending for many years to come. FX: although the shekel remained stable last week, we continue to be concerned regarding both geopolitical risks (escalation in the North), but probably more concerned regarding domestic strife once the warfare subsides. Although Netanyahu’s popularity is way down, he will seek to survive politically at all costs (including fiscal) and it will rather difficult to vote for early elections, or envision an internal Likud replacement. The outcome will most likely be more escalation in the animosity between coalition versus anti-coalition supporters. In short, we are likely to see further shekel weakness into 2024,...