Victor Behar (photo by Inbal Marmari, shutterstock, Magma Images)
Victor Behar, director of the financial division at Bank Hapoalim, says today that as the macro data looks like today, the Israeli economy has moved from the growth phase to contraction. Behar adds that his analysis shows that this year’s deficit will be much higher than the government’s estimates, which speak of a deficit of 1%.
“The economic indicators of the last few months point to a trend of contraction in the GDP. The export of hi-tech services, which was the main growth engine of the economy last year, registered a sharp decrease of 5.7% in December, in the export of goods the downward trend continued in January as well, and the revenue in the sectors of the economy, an indicator Private consumption did not grow (in real terms) in the last quarter of 2022. Inflation, interest rates and political uncertainty are expected to cloud growth, and as it seems now, GDP has shifted to a contractionary trend,” says Behar.
More in-
“The government approved the state budget proposal for the years 2023-2024. The amount of the budget reaches NIS 484 and 514 billion respectively. This is an increase of about 7% in the budget compared to last year, not a high rate given that inflation last year was 5.3%. The first half of the year is being conducted without an approved budget and this should help the government meet the annual budget. The road to approval of the budget in the Knesset is still long, and it is not clear what the sources will be for financing the coalition commitments.
“According to the planning, the budget deficit should reach 1% of GDP this year. We estimate that this year we will see a decrease in tax revenues, and keeping up with expenses is also challenging in view of the salary agreements and commitments to the coalition members. In our estimation, the deficit is expected to be significantly higher than 1% of GDP,” he adds.
“The uncertainty surrounding the reform of the judicial system led to a devaluation of the shekel against the basket of currencies. In the last week, the shekel depreciated by 2.4% against the basket, and from the beginning of the month, a cumulative devaluation of 3.6% was recorded since the beginning of February. In contrast to the devaluation events that occurred in recent years, which usually resulted from a decrease in the liquidity of the dollar In the markets, we now see a desire by investors to be exposed to the underlying asset, that is, to increase holdings in foreign exchange.
“This change may also be affected by the deterioration in the fiscal environment, which until now was seen as one of the factors that supported a strong shekel over time, as well as a decrease in the current account surplus and high-tech investments. We believe that if the depreciation of the shekel continues in the coming weeks, the Bank of Israel may intervene in the foreign exchange market, and for the first time to sell foreign exchange balances.
“The devaluation will increase inflation in the short term. At the current exchange rate levels, we expect inflation at a rate of about 3.5% in the coming year. The transmission of the devaluation to inflation is partly immediate through items such as fuel and travel abroad, and partly takes several months like other import prices. The slowdown in growth will work to moderate inflation more in the second half of the year.
“Expectations for inflation are higher than the target, and therefore we estimate that the interest rate will also rise in the next decision to the level of 4.5%. The derivatives market now embodies an interest rate of about 5% at the end of this year. At these interest rates, the impact on economic activity in general and on the real estate industry in particular is high, and we Therefore, we believe that the interest rate will stop a little before 5%, but as mentioned, a lot now depends on the development of the exchange rate,” Bahar continues.
The ten-year yield of the Israeli government (in shekels) became higher than that of the US government (in dollars) and today reached a level of approximately 4%. “We believe that the closing of the gaps between the bond yields mainly reflects the exchange rate risk, which has become higher Due to the political uncertainty, and perhaps a little bit of the country risk as well. The yields in Israel in most of the last years have been lower than those in the US, against a background of a better fiscal situation, a current account surplus and low inflation.
“Inflation is now approaching that in the US, the fiscal advantage still exists, although it has weakened in light of the expected increase in the deficit, and the current account surplus is also still with us, even if to a lesser extent compared to previous years,” he concludes.
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