The fiscal deficit is expected to undershoot in 2022, supporting low issuance

ISRAEL - Report 15 Nov 2021 by Jonathan Katz


The fiscal deficit declines sharply:

- In the last 12 months through October the fiscal deficit declined to 5.5% GDP from 11.9% in March.
- Tax revenues in January-October 2021 are up 19% in real terms compared to two years ago (pre-Covid).
- We expect a fiscal deficit this year of 4.7% GDP, below the official forecast of 5.5% (8.2% at the beginning of the year).
- The fiscal deficit in 2022 is likely to decline to 2.7% GDP
- The official target is 3.9% but the current strong tax revenue trend supports a lower deficit. The public sector wage freeze will also keep expenditures moderate.
- Fiscal financing will be facilitated by a sovereign issue abroad, large land sales and tapping excess financing from previous years.
Bottom line: We expect average bond issuance of 6.5bn ILS per month (including buybacks), similar to the present pace, and supportive of the bond market.

FX: The shekel continued to appreciate last week, especially against the Euro (1.1%) due to USD global strengthening.
- Fitch reaffirmed Israel’s A+ rating, citing the positive fiscal developments and budget approval.
- Israeli institutions reduced their FX exposure to 17.7% in September from 18.3% in August.
- Governor Yaron reiterated on Friday that the pace of intervention will depend on the rate of economic growth and recovery. At the moment, this appears robust.

In Q3, new home sales increased by 4% q/q, following an increase of 22% in Q2. Unsold inventory has declined, and further price pressure is likely, both for housing purchases and housing rentals (we expect 3.1% NTM in housing rentals, contributing 0.8% to inflation).

Manufacturing exports expanded by 6.5% saar in August-October, especially hi-tech sector exports. Import growth of raw materials remains strong, suggesting activity will remain strong in the coming months.

Important data this week: Monday: October’s CPI. We expect 0.4% m/m, impacted by a seasonal increase in clothing prices, as well as higher prices for vehicles, furniture and home appliances. Housing rental prices are expected to increase by 0.2% m/m and 2.2% y/y, accelerating from 1.9%. Tuesday: GDP growth for Q321 (first estimate). We expect growth of 6% on the back of expanding private consumption and hi-tech exports. Thursday: Job vacancies for October, an important indicator of labor tightness.

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