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Eco Emerging // 1 quarter 2021
economic-research.bnpparibas.com
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were very substantial in 2020. Foreign direct investment reached
USD 19.4 billion (up 56% on 3Q 2019), and portfolio investment
was USD 17 billion (from USD -1.1 billion in 3Q 2019) thanks to the
government’s Eurobond issue.
GOVERNMENT BUDGET BALANCE (ILS BN)
2015
2019
2020
All of these elements contributed to an increase in the balance of
payments surplus and the strengthening of the shekel against the US
dollar. This trend was further strengthened by the weakness of the
US dollar on international markets and by the rise of international
asset markets, both of which are traditionally associated with a
stronger shekel. The BoI continued to buy foreign currency in 2020
20
0
-
-
-
20
40
60
(
USD 21 billion) to help limit the currency’s appreciation. It has
announced its willingness to increase market interventions in 2021
USD 30 billion scheduled). This should limit shekel appreciation in
-80
100
120
140
(
-
-
-
a context of narrowing current account surpluses as the economy
recovers.
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
SOURCE: MINISTRY OF FINANCE, BNP PARIBAS
THE FISCAL OUTLOOK IN AN UNCERTAIN POLITICAL CLIMATE
Unsurprisingly, the budget deficit is expected to be significant in 2020,
due to a fall in tax receipts (-9.6% in the first 11 months) and more
importantly the increase in spending (20% over the same period).
Exceptional fiscal measures to support the economy were worth some
CHART 2
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% of GDP, according to the IMF. The total deficit for 2020 is thus likely
to have been around 12% of GDP. In 2021 the reduction in the deficit
will probably be modest, despite the return to growth. At least some of
the economic support measures should be maintained. On the receipts
side, continuing restrictions will reduce income from VAT (21% of total
government receipts). All in all, we expect a budget deficit of 7.5% of
GDP in 2021.
addition, although the trend in government debt was not favourable in
020 (from 60% of GDP in 2019 to 75% in 2020), its structure remains
2
an element of strength of public finances. The average maturity of the
stock of debt was 8.2 years in 2019 (6.8 in 2008). Debt service costs
have fallen from 10.7% of total government receipts in 2010 to 5.6%
in 2019. The majority of the budget’s financing comes from the local
market. At the end of 2019, around 85% of government debt was in
local hands, with 31% off the market. Israeli mutual and pension funds
are significant holders of the tradable part of the debt (43% of the
total).
The lack of a budget law since 2019, due to political volatility, is a
source of uncertainty over the future path of public finances. The
government operates on the basis of a budget passed two years ago
that is rolled over from month to month. However, this baseline budget
was increased in 2020 in order to adapt to the economic context in
The effect of political volatility on public finances could be more
significant over the medium to long term. In order to boost potential
growth, a number of structural reforms are needed, to improve
productivity across the economy and reduce inequalities. These
reforms will be costly and will require some difficult decisions to be
made, particularly in terms of tax policy. For the time being, the lack of
political stability limits the chances of putting such reforms in place.
2
021.
In the short term, we believe that the consequences of the absence
of an approved budget can be managed and that the deterioration of
deficit and debt ratios will not result in any increase in sovereign risk.
The political trend remains favourable to the control of budget deficits,
notably through the introduction of a mechanism for the control of
spending that ties any new commitment to an identified source of
revenue. However, the structural budget deficit, as calculated by the
IMF, has been rising steadily since 2015. It reached 4.1% of GDP in 2019,
from 0.7% of GDP in 2015, mainly due to higher social spending and
investment. It is currently difficult to predict the trajectory of public
spending over the coming years. Even if the government succeeds
in controlling the spread of the virus in the short term, its economic
consequences will be long-lasting and will require some form of fiscal
support to be maintained.
Completed on 14 January 2021
Pascal DEVAUX
pascal.devaux@bnpparibas.com
The fiscal position benefits from significant sources of support, which
should allow any increase in the cost of financing to be contained. In
the short term, the BoI looks set to continue its policy of purchasing
government papers and private-sector securities. In November
2
020, the BoI held 7% of the tradable Treasury bonds issued by the
government (from 0.4% at the end of 2019). The impact on money
supply is negligible (money supply increased by 0.7%). This is likely to
help limit possible upward pressure on the rates at issuance. In
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