In a survey of the Israeli economy, Swiss bank UBS notes that the economy has been in a difficult and complex situation since the Hamas attack on October 7, 2023, and sets a forecast for the shekel based on three scenarios.
“GDP and the financial hit to the Israeli economy since October 7, 2023, amid continued uncertainty about the duration of the war, have negatively affected Israeli assets,” the bank’s analysts wrote. “Following the events of October 7, credit spreads were rapidly priced into 2-3 downgrades (which have largely materialized since the last 2 downgrade by Moody’s); but they have also continued to decline further since then – a process that has It was also accompanied by weak performance of local currency bonds (which raised the yield gap on 10-year US Treasury bonds to levels last seen in 2013. The shekel was stable in nominal terms after a short-term sell-off, but largely maintained its cheapness). This accumulated during the months leading up to the war while judicial reform was in focus.
The survey was written before Iran’s missile attack on Israel last week, and therefore does not take into account escalation in the form of a direct conflict between Iran and Israel.
The bank is studying three scenarios for the next six to twelve months.
“Scenario No. 1 is a ceasefire on all fronts; under scenario No. 2, the intensity of the war fades; and scenario No. 3 is an expansion and extension of the Israeli/Lebanese front (the war ends only at the end of 2025).”
The survey indicates that Scenario 2 is similar to the scenario predicted by the Bank of Israel in July.
Under Scenario 1, UBS expects the NIS to strengthen, with the NIS/USD exchange rate falling to a range of NIS 3.40-3.50/$. The bank says this will be led by unleashing pent-up demand for the shekel via local and international hedging from a favorable starting point. In Scenario 2, the bank says: “These dynamics are also likely to continue… but to a much lesser extent.” In this scenario, UBS sees the shekel/dollar rate at NIS 3.60-3.70/$.
The survey indicates that “Scenario No. 3 corresponds to a continued high financial risk premium and further downgrades, offset by possible intervention from the investment bank.” In this scenario, the expected range for the NIS/USD rate is 3.80-3.90 NIS/USD. At around NIS 3.81/$, the current price is within this range.
The survey also comments on developments in the fiscal deficit, which according to the Ministry of Finance’s forecasts will reach 6.6% of GDP in 2024. Analysts say that under scenarios No. 1 and No. 2, the twelve-month deficit is about to reach its peak, but will still be higher than Official forecast for this year. “The bad news is that the planned fiscal consolidation measures (targeting a deficit of 4.0% of GDP next year) face implementation risk; while consolidation measures will also need to be extended beyond 2025 because in all three scenarios they are likely to Defense spending is structurally rising (by 1% to 2% of GDP).”
On the positive side, UBS points out that despite the difficult picture, there are also factors supporting the Israeli economy. One of the most important of these factors is the pent-up demand for the shekel from institutional investors. UBS estimates that when the geopolitical situation improves, these investors may want to return to normal hedging levels, and in order to do so they could sell large amounts of dollars – up to $15 billion – which would support the appreciation of the shekel.
In addition, there is a possibility that the Bank of Israel could intervene to stabilize the market in the event of a shock, especially since its foreign currency reserves amount to 42% of GDP, i.e. more than $200 billion. At the beginning of the war, the Bank announced an intervention program amounting to $30 billion, although in reality it used only $8.5 billion.
Another factor supporting the shekel is the interest rate gap versus 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, there is expected to be a significant drop in interest rates. moderate. However, analysts state that “the process of reallocating households towards foreign assets will remain.”
Regarding what will happen to the price of oil if the scope of the conflict expands, analysts wrote that the major disruption to Iranian oil exports will lead to a rise, but it will be somewhat moderate, reaching only a few dollars per barrel. This is because the spare capacity of OPEC+ countries amounts to about 6 million barrels per day, compared to Iranian production of about 3.35 million barrels per day and Iranian exports of 1.7-1.8 million barrels per day.
Published by Globes, Israel Business News – en.globes.co.il – on October 6, 2024.
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