In its weekly macroeconomic survey, Harel Finance Ltd. says that Operation Cast Lead has added a burden to an already tenuous outlook for the year. The operation, especially with the launch of ground operations and the call-up of thousands of IDF reservists, is creating significant budget challenges. It adds that the budget situation appears grimmer than before the launch of the campaign.
Harel Finance says that the 2009 budget deficit is liable to greatly exceed the 2003 record of 5.3% of GDP, and reach levels last seen in the mid-1980s, before the economic stabilization plan. Such a large budget deficit is liable to increase Israel's fiscal risk premium and increase long-term bond yields.
Harel Finance adds, "At the very least, in order to finance such a large deficit, the government will be compelled to greatly increase bond issues beyond original projections, which will contribute to a bonds surplus, falling prices, and rising yields."
In the past few days, prices for long-term government bonds have fallen by 3%, and their yields have risen appreciably.
Harel Finance expects the CPI to fall by 0.1% in December 2008 and by 0.3% in January 2009. It predicts 1.6% inflation over the next 12 months, and 2% through May 2010. It also expects the interest rate to be 1.5% in June.
As for housing, Harel Finance says, "The supply of apartments has fallen to a low of 7.7 months of sales. This is causing pressure to raise prices, which could offset the downward pressure on prices caused by the economic slowdown and drop in demand."
Published by Globes [online], Israel business news - www.globes-online.com - on January 6, 2009
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