BoI FX purchases will most likely neutralize positive shekel fundamentals

ISRAEL - In Brief 24 Jan 2021 by Jonathan Katz

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We see the FX purchases neutralizing the CA surplus and net FDI. 2020 was an exceptional year with the CA surplus and FDI estimated at 40bn USD (double FX intervention of 21bn). We note that not all of the real inflows reach the FX market. Higher energy prices and a likely return of tourism in 2H21 will reduce the CA surplus this year, and the boom in hi-tech sector service investments will most likely slow modestly in 2021. With the CA surplus and FDI expected to equal FX intervention, the shekel will be impacted more by net financial flows (including FX hedging). In 2017-2019 net financial flows were negative, but turned positive in 2020 with Israel joining WGBI. We expect the shekel to weaken to 3.40/USD by end-Q121. Economic indicators point to deceleration in January Credit card purchases through 19.1 declined by 9% y/y. Mobility to the workplace has decline with the tightening of the closure. In the 1st half of January, the CBS consumer confidence index declined by 5 points. Broad unemployment (including furloughs) increased to 13.7% in the 2nd half of December (from 12.7% in the 1st half). The manufacturing PMI declined by 6.2 points in December to 50.9. Industrial production is up 2.6% y\y in November, while total hours worked declined by 5.1%, therefore pushing productivity up 8% y/y. The public debt/GDP ratio increased to 73% in 2020 from 60% in 2019, less than initially expected.Vaccinations continue to proceed rapidly: The number of infections has stabilized and even slowed modestly at around 7,000 per day or below, while the rate of infection appears to have declined. 2.5 million people have already vaccinated, and 78% of all those ages 60 and above. The c...