Goldman Sachs and UBS see shekel gaining sharply

The ceasefire agreement between Israel and Lebanon, which took effect last week, has led investment banks and rating agencies to revise their forecasts for the Israeli economy. Some of these organizations have provided particularly positive updates, which include a significant strengthening of the shekel and an improvement in Israel’s credit rating. On the other hand, others see a more complex picture.

Since talks about a potential deal began, the markets have been indicating massive positivity. Israel’s risk premium, as measured by the credit default swaps index, fell sharply, the Tel Aviv Stock Exchange was on the rise, and the shekel rose by 1.6% last week against a basket of major currencies.

UBS has issued a special report to investors analyzing the impact of the ceasefire between Israel and Lebanon, entitled “The Lebanon-Israel Ceasefire, Where Do We Go from Here?” UBS analysts believe that “the ceasefire agreement indicates a significant reduction in geopolitical tensions between Israel and Lebanon.” They expect that if the ceasefire holds, we will see a significant rise in the price of the shekel against the US dollar. If the shekel-dollar exchange rate is currently 3.64 shekels/dollar, according to UBS forecasts, it will reach 3.4-3.5 shekels/dollar. They say that this assessment depends on a situation in which there is a ceasefire on all fronts of the war.

Also in this scenario, Israel’s credit rating will begin to gradually improve. Currently, the three major international rating agencies have lowered the country’s credit rating and given a negative outlook for Israel. In other words, the expectation is that things will get worse. But the Swiss bank now sees expectations changing direction. “There are positive expectations on the table from the second half of 2025.”

UBS adds: “The ceasefire reduces financial risks for Israel. The high costs of the military campaign in the north have exceeded budget expectations, but the new stability allows for better control of defense spending.”

Given the lower risks, UBS estimates that 3.8% GDP growth in Israel in 2025 seems more realistic, although “the government could reduce next year’s budget reduction plan, which is estimated at 1.8% of GDP.”

However, UBS expresses concern that the ceasefire will not hold but pins hopes that the participation of the United States and France will improve the agreement’s chances of success compared to previous initiatives.

Goldman Sachs: “The shekel is not expensive”

Like UBS, investment bank Goldman Sachs also gave a positive outlook for Israel, especially the shekel. In a report covering the global forex market, Goldman Sachs said: “Geopolitical developments in the Middle East remain the main factor affecting the exchange rate of the US dollar against the shekel. The announcement of a ceasefire in Lebanon this week has put the shekel in a better position.” As one of the leading currencies in its performance.”

Goldman Sachs believes the shekel is likely to rise further. “It is still not expensive,” the report says. “Macroeconomic fundamentals point to the possibility of further strengthening of the shekel, if the Israeli risk premium continues to decline.”

The bank expects that the shekel exchange rate against the US dollar could rise to 3.30 shekels/dollar – that is, 0.35 shekels lower than its current level.

Rating agencies are more skeptical

Rating agencies Fitch and Moody’s also issued reports on the Israeli economy in the wake of the ceasefire agreement. The ceasefire between Israel and Hezbollah, if it holds, will reduce financial risks, but developments in Gaza and Iran will still play an important role in determining Israel’s financial and economic trajectory, Fitch wrote. Fitch believes that the war in Gaza will continue until 2025, albeit with varying levels of intensity. This indicates continued high spending on immediate military needs and disruption of production in border areas, as well as tourism and construction.

Regarding the deficit, the rating agency expects a budget deficit of 7.8% in 2024 and 5.2% in 2025. This compares with forecasts of 7.8% and 4.6%, respectively, in its report published in August.

Moody’s, which sharply downgraded Israel’s credit rating this year to BBB+, issued an updated report in which it confirmed that the ceasefire between Israel and Hezbollah reduces one source of geopolitical risk, while others remain unchanged. The bottom line is that there is a consensus that a ceasefire on the northern front reduces pressure on the Israeli economy and reduces risks. Overall, however, the agencies emphasize remaining risks, including the war in Gaza and tensions with Iran. While UBS offers a more optimistic outlook, Moody’s prefers a more cautious approach.

Published by Globes, Israel Business News – en.globes.co.il – on December 1, 2024.

© Copyright Globes Publisher Itonut (1983) Ltd., 2024.