Citi analyst David Lubin warns that a growing trade deficit can be "less than supportive" to the shekel. The trade deficit in May was around $626 million, as export growth declined while imports grew.
Lubin does note that the trade deficit over the past several months was negatively affected by the rise in oil prices during early 2010, since Israel has an unusually large fuel deficit, reaching 2.5% of GDP in 2007 compared to an average of 1% for its fellow OECD members. Lubin says that "optimists might expect the recent decline in energy prices might help to keep Israeli deficits low in the coming months."
However, the analyst says, "The pattern of GDP growth reinforces the idea that trade deficits will widen in the coming months", adding "Consumer spending growth in the first quarter reached 5.5% year on year, compared to overall GDP growth of 3.2%, and it is very likely that this pattern will be sustained, putting further upward pressure on trade deficits."
Citi reiterates a 3.2% GDP growth forecast for this year, which is lower than the Bank of Israel's 3.7% forecast, and also sees a current account surplus of less than the $4.8 billion expected by the Bank of Israel. Yet that may not be seen as a negative by everyone, says Lubin. "Certainly there is no disaster here for the shekel: Israel remains a net external creditor, and this should help keep the current account in surplus for the foreseeable future. Yet we think the shekel is unlikely to regain its status as a "favorite trade" of institutional investors any time soon. That would be pleasant news for the Bank of Israel, whose interventions in the foreign exchange market are likely to be less needed in the coming months."
Published by Globes [online], Israel business news - www.globes-online.com - on June 15, 2010
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