In recent days, the shekel fell against the foreign currencies, completing a monthly weakening of more than 8% against the dollar and more than 6% against the euro on Wednesday afternoon. The alarming trend has direct and indirect consequences for the national debt of the State of Israel, which may swell to enormous proportions in the scenario of continued depreciation of the shekel.
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A Globes investigation shows that the changes in foreign exchange rates in the last month alone have increased the state’s debt by approximately 10 billion shekels. The Accountant General’s Division at the Ministry of Finance issues bonds to foreign investors in dollars and euros, which are linked to fluctuations in currency rates. According to the Ministry of Finance, every percentage point of strengthening The dollar against the shekel causes the Israeli debt to become more expensive by about a billion shekels. When the euro increases by a percentage, the debt becomes more expensive by 300-400 million shekels.
No real panic, for now
Compared to other countries, Israel is well protected from foreign exchange effects on the debt. The state manages a debt portfolio of a little over one trillion shekels, with the shekel market meeting most of the financing needs of the state coffers. About 85% of the debt is in shekels, but the small balance is also Relatively in foreign exchange, it has a considerable amount in general of about NIS 150 billion. Out of the debt that the treasury manages in foreign currency, the large majority is in dollars and the rest mainly in euros (about 27%).
Despite the immediate jump in debt in response to the weakening of the shekel, the problem is mainly in the long term. The national debt portfolio is managed in annual terms and the average debt is close to 10 years long. Therefore, this is not a situation where tomorrow morning the treasury will need the dollars that are becoming more expensive to pay off the entire debt. The immediate payments are at interest on the debt, and most of the accountant general’s dollar interest expenses are hedged one year ahead. In other words, the interest on the existing debt in foreign currency will not rise in the immediate term (in contrast to the interest on new debt raisings, which rise in Israel and most of the world).
Yehli Rotenberg, Accountant General at the Ministry of Finance / Photo: Eyal Yitzhar
However, in the long term, the weakening of the Israeli currency is expected to fuel inflation and make the goods and services imported from abroad more expensive. Some of the bonds issued by the Treasury are also linked to the consumer price index, which causes the debt to swell by billions of additional shekels. Another risk is that increased inflation will force the Bank of Israel to continue raising interest rates, which increase the debt even more.
Data from recent years shows that about half of the national debt – NIS 500 billion – is linked to the consumer price index. Inflation today is at a 14-year high, with an annual rate of 5.4%, where each percentage is worth billions of shekels. However, the volume of index-linked bonds from the state’s debt portfolio may decrease in the coming years, with the cessation of the issuance of the designated bonds in recent months.
Changing the balance of power could damage the shekel
But according to the analysts, the trends of the last few days may be just the beginning. In the markets, the steep trend is interpreted mainly as investors’ growing fear of the weakening of the independence of the judiciary and the Bank of Israel following the reform that the government is promoting. The legislation to change the balance of power between the politicians and the courts was launched this week despite warnings from investment houses and international credit rating agencies.
If that was not enough, the weakening of Israel’s image among investors was compounded by statements by political parties, such as Foreign Minister Eli Cohen and Finance Committee Chairman Moshe Gafni, which were interpreted as attempts to undermine the independence of the central bank.
The Treasury is trying to reassure investors and trying to convey a “business as usual” atmosphere. At the moment there are no intentions to take hasty steps such as bringing forward the repayment of debts in response to further weakening of the currency. However, even there they know very well that if the sharp fluctuations of the last few days continue for more than a week then the red lights will turn on.
The continued weakening of the currency, combined with other indicators such as the yield on the bond and the insurance premium on it, will return the country to negative GDP debt figures, after a significant improvement in the last year – in 2022 the country’s debt-to-product ratio will decrease from approximately 68% to approximately 61% only, while utilizing the budget surpluses to close the debt.