Markets will be following fiscal adjustments closely

ISRAEL - In Brief 14 Jan 2024 by Jonathan Katz

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The fiscal deficit reached 4.2% GDP in 2023. Expenditures increased by 14.2% (mostly in Q4 due to the war) and revenues declined by 6.4%. The deficit is expected to reach 5.7% in 2024 and possibly higher. Fiscal financing will be diverse, both abroad and domestic, but will require large gross domestic bond issuance of 145bn ILS. The bond market: The 10-year Israel spread over US Treasuries recently increased to +0.3% and could push higher without a credible fiscal program to cap the fiscal deficit. The government is expected to hammer this out in the coming week. Inflation: We have increased our inflation forecast for 2024 to 2.9%. We see four drivers of higher inflation: Higher shipping costs from Asia, accelerating rental prices in 2H24, a mini pent-up demand surge as the war ends, and a weaker shekel on internal political rift and weakening fiscal credibility. The approved 5% increase of the cigarette tax and VAT on digital services (Netflix) are expected to contribute 0.15% to inflation. Netanyahu has not yet to approve a 1% increase in VAT. FX: The shekel weakened by 2.2% last week against the basket, due to concern regarding escalation in the North. Economic data: Trade data point to a contraction of both imports and exports in Q4. In December exports expanded rapidly while imports remained weak, contributing to lower trade deficit The CBS Tendency Survey in December points to a partial rebound, in activity and employment, except for construction and tourism. The hi-tech service sector is expecting an increase in exports and employment next month. New home sales increased by 21% m/m in November but remain historically low (-43% y/y). Geopolitics: The Israeli offe...