Lower than expected deficit in 2020 results in excess fiscal financing
The final print for the fiscal deficit in 2020 was 160.3bn ILS, or an estimated 11.7% in terms of GDP. The Ministry of Finance currently expects only a modest contraction in GDP of 3.3% in 2020 (The Bank of Israel expects -3.7%). The main reason for the sharp increase in the fiscal deficit (from 3.7% in 2019) was the additional expenditure for dealing with the Covid crisis which reached 5% GDP (69bn ILS), while the contraction in tax revenues was actually a modest 1.6% y/y, and in December 2020 actually increased by 3.3% y/y on the back of large automobile purchases (which are heavily taxed in Israel) before higher taxation kicks in in January 2021. The fiscal deficit in 2020 surprised the Ministry of Finance and the Bank of Israel, as both institutions were expecting a higher fiscal deficit of 13% GDP, under the assumption that expenditures for the crisis would be higher and taxes lower. For this reason, fiscal deficit financing (from abroad and domestically) was actually 182.5bn ILS in 2020, or 22.3bn above fiscal requirements (1.6% GDP). It is fair to assume that this excess financing will be taken into account in the 2021 fiscal issuance plan, and is likely to support lower bond issuance, especially in the second half of 2021, assuming Israel recovers from the crisis following mass inoculation.