HSBC expects a further 25 basis point rise in the Bank of Israel's key lending rate for May. Noting a strong fiscal performance in the first quarter and buoyant consumer demand, HSBC analyst Jonathan Katz describes the state of the Israeli economy as "robust," and says that this together with a possible ceasefire in Israel's southern region following an escalation of hostilities will be positive for the shekel. HSBC forecasts an end of year shekel dollar rate of NIS 3.4/$, which compares with a current rate of NIS 3.4389.
Katz writes that "the fiscal budget performance in the first three months of the year has been a pleasant surprise, reflecting a budget surplus of NIS 2.0 billion as compared to a budget deficit of NIS 3.6 billion in the first quarter of 2010."
On the consumer front, Katz notes that "strong tax revenues in March on the back of surging consumer imports (new vehicles especially) suggest that household demand remained strong last month."
Katz believes that the fiscal target of 3% of GDP will probably be met this year and that the government debt will decline from 75% of GDP in 2010 to 73% in 2011 (HSBC estimate), and possibly lower. "This is all good news for the long end of the curve as government bond issuance will remain low throughout the year." Katz notes that the Ministry of Finance is hopeful that Israel's credit rating will be revised upwards from A solid to A+, possibly towards the end of the year or early 2012, but adds that "much depends on the level of violence in the region."
On monetary policy is concerned, Katz writes, "Positive fiscal news is also positive for the shekel, to some extent, by boosting fiscal credibility. In addition, robust consumer demand in March will be rate hike supportive at the next monetary meeting on 24 April and with inflation expected to reach 4.4% year-on-year in March (HSBC estimate, up from 4.2%), we currently are expecting a 25bp hike at the end of the month. The Ministry of Finance is finally moving to implement a capital gains tax on foreigners in the Makam market (up to one year t-bills), but this legislature will only be discussed in Parliament after May 15, following the holiday recess. We expect implementation sometime around mid-year.
"Meanwhile, the Bank of Israel will continue to purchase foreign currency and may announce additional FX controls. The recent calm and possible ceasefire in Israel's southern region following an escalation of hostilities will also be shekel positive this week."
Published by Globes [online], Israel business news - www.globes-online.com - on April 11, 2011
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