FX intervention slows as the economy recovers

ISRAEL - In Brief 08 Aug 2021 by Jonathan Katz
The fiscal deficit continues to contract, reaching 9.3% GDP LTM In July, the deficit reached 0.8bn ILS compared to 12bn in July 2020. Tax revenues in Jan-July are up 14% compared to Jan-July 2019. Non-Covid expenditures are up 3.4% and Covid supports have declined. We expect a deficit of close to 6% this year. Bond issuance is expected to continue to decline by end-year. The BoI reduced FX purchases in July to 0.5bn USD This follows 3.2bn in June and 25bn in 1H21.The Governor has stated in the past that the level of FX intervention will be a function of the economic recovery. FDI remains shekel supportive, as IPO’s into Israeli hi-tech companies reached 2.4bn in July and 14.3bn YTD, compared to 10bn in 2020. In July, the shekel appreciated by 0.7% against the basket, following 1.0% in June. The first week of August witnessed a further 0.8% appreciation. Disposable income is up modestly so far this year. In January-May, the total wage payments + government Covid supports to workers increased by 4% on average compared to 2020. This rate of growth is not inflationary, in light of the sharp improvement in productivity of 6% last year. We note that public wage agreements will be postponed until 2023, which is expected to slow income growth. We estimate that seasonally adjusted broad unemployment declined to 8.6% in the first two weeks of July, from 8.8% in the second half of June. Credit growth: Total bank credit is up 9% since the beginning of 2020. · Household housing credit is up 14% (through May 21), non-housing credit actually has contracted by 6%. Private sector credit is up 12%, in part due to government loan guarantees. The bond market: In July, the BoI purchased 3....

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