“The impacts of GDP and fiscal deficits have been significant,” the bank’s analysts wrote Israeli economy Since October 7, 2023, amid ongoing uncertainty about the duration of the war, Israeli assets have been damaged.” They added: “Following the events October 7investors quickly priced in credit rating downgrades of two to three notches (which have since largely materialized with the recent two-notch downgrade by Moody’s), but prices have continued to fall since then – which has also been accompanied by poor bond performance. Domestic (which led to the widening of the yield gap between ten-year bonds and US Treasury bonds to levels not seen since 2013).
The shekel stabilized in nominal terms after a short-term sell-off, but largely maintained the decline achieved during the months before the war.
The bank sets three scenarios for the next six to twelve months: The first scenario is a ceasefire on all fronts. While the second scenario assumes a decline in the intensity of the war, the third scenario is linked to the expansion and expansion of the Israel/Lebanon front, where the war ends only at the end of 2025. It is noteworthy that the second scenario is similar to the one expected by the Bank of Israel last July.
- Under the first scenario, UBS believes that the shekel will strengthen, with the shekel-to-shekel exchange rate falling Dollar To a range between 3.40 and 3.50 shekels per dollar. The bank says this will be led by releasing pent-up demand for the shekel through local and international hedging from a positive starting point.
- While in the second scenario, the bank says: “It is likely that these dynamics will also occur… but to a much lesser extent.” In this scenario, UBS expects the shekel/dollar rate to be in the range of NIS 3.60-3.70.
- As for the third scenario, it is consistent with the presence of a continuing high financial risk premium and other credit rating downgrades, compensated by possible interventions from the Bank of Israel. In this scenario, the expected range for the shekel rate against the dollar is 3.80-3.90 shekels.
Financial deficit
The bank also comments on developments in the fiscal deficit, which according to the Ministry of Finance’s forecasts will be 6.6 percent of GDP in 2024. Analysts say that under the first and second scenarios, the twelve-month deficit is expected to reach its peak, but will still be higher than the official forecast for the year. .
He adds: “The planned austerity measures (targeting a deficit of 4.0 percent of GDP next year) face implementation risks, while austerity measures will also need to be extended beyond 2025 as defense expenditures are likely to rise structurally (by 1 percent). -2% of GDP),” as stated in the report.
Supporting factors
On the positive side, UBS points out that despite the difficult picture, there are also factors supporting the Israeli economy. One of the main factors is the pent-up demand for the shekel by institutional investors. UBS estimates that when the geopolitical situation improves, these investors will likely want to return to normal hedging levels, and in order to do so they may sell large amounts of dollars – up to $15 billion – which will support the shekel’s appreciation.
In addition, there is the possibility of the Bank of Israel intervening to stabilize the market in the event of a shock, especially since its foreign currency reserves are at a healthy level of 42% of GDP, i.e. more than $200 billion. At the beginning of the war, the Bank announced an intervention program of up to $30 billion, although it actually used only $8.5 billion.
Another factor supporting the shekel is the gap in interest rates compared to the US and Europe, where interest rates are expected to fall significantly in the coming quarters, while in Israel, if there is any decline at all, it is expected to be moderate. However, analysts point out that “the process of reallocating households towards foreign assets will remain.”
“Supported” currency
For his part, the economic expert and chief economist at ACY, Dr. Nidal Al-Shaar, said in statements to the “Eqtisad Sky News Arabia” website:
- “The Israeli shekel was never a global currency, but rather a local currency used in trading within Israel. Although it can be traded in global markets, it is considered a rare or exotic currency, such as the Turkish lira or other currencies of emerging countries.”
- “The shekel is backed by a large reserve of dollars and euros thanks to the close relations between Israel and the United States, the European Union, some African countries, Canada, and South Africa. Therefore, the Israeli Central Bank has a huge reserve of foreign currencies.”
- “The Israeli economy is famous for its high levels of export, especially in the areas of technology, which ensures a constant inflow of foreign currencies such as the dollar and the euro, and this enhances the strength of the shekel.”
- “The shekel has been relatively stable since the beginning of the last war in October at around 3.70-3.75 against the dollar. However, the currency has witnessed significant fluctuations recently, but has maintained its value thanks to the reserves available at the Central Bank of Israel.”
He continued: “The Israeli economy is characterized by the ease of obtaining financial support, due to the clear political bias towards Israel and its preferential treatment by the United States, the European Union, and even Russia at times,” stressing that since the Gaza War, the shekel can be described as a “geopolitical currency,” affected by political tensions. The escalation in the Middle East is witnessing fluctuations according to these developments.
Al-Shaar concluded by saying: “Despite the credit cuts that Israel has been subjected to several times, the shekel has maintained its value against other currencies. The current situation of the shekel may be better than it was during the Corona pandemic, thanks to the expected support for the Israeli economy, despite the large costs incurred.” Israel has incurred losses in its war on Gaza, which have exceeded $60 billion so far.
“In conclusion, it is believed that the Israeli economy enjoys a kind of “immunity” due to its political situation, and the shekel is unlikely to witness a significant decline in the coming period, but rather will maintain its position and value vis-à-vis other currencies,” according to Al-Shaar.
Challenges
In addition, the advisor to the Arab Center for Studies and Research, Abu Bakr Al-Deeb, indicated in special statements to the “Eqtisad Sky News Arabia” website that despite the plans drawn up by the Central Bank of Israel to pump more than 30 billion dollars through the sale of foreign currencies to maintain the stability of the currency, These banking and governmental measures did not prevent the shekel from declining due to the damage to sectors of the Israeli economy in general, including agriculture, industry, trade, import and export, and the technology industry, and the cessation of employment, whether Palestinian or foreign labor from Thailand.
He continued: “All major sectors were affected, including the settlements near the Gaza Strip and Lebanon, on which the Israeli economy relied heavily on agriculture. Even tourism activity stopped, as hotels in and around Tel Aviv hosted displaced people from the north and south instead of tourists.” “.
He explained, “The Israeli government finds itself forced to pay compensation to the wounded, injured, and reserve soldiers, as more than 350,000 reserve soldiers were recalled from their work in factories and companies, which led to the cessation of production, a decline in exports, and a decrease in the flow of foreign currency to Israel.”
Despite the Central Bank’s support for the shekel using foreign currencies, El-Deeb pointed out that “future scenarios for the shekel depend greatly on developments in the conflict. Will it end soon? Or will it continue for a long time? Or will it expand to include other regions, such as the conflict with Iran?”
He added: “If the conflict with Iran develops, the movement of trade and exports in Israel will completely stop, which could lead to a major collapse of the shekel… The scenarios are many, and the future seems bleak,” as he described it.
