Leader Capital Markets today says that the government's latest measures are insignificant, and that Israel's stable credit rating is at risk.
In a review by chief economist Yonatan Katz, Leader says, "Despite the impression in the media that the government is taking substantial steps, that is not case. There are almost no budget cuts, only tax hikes. We believe that this is too little, too late. Without more substantial steps as part of the 2013 budget, Israel's stable rating is in jeopardy."
"Several indicators point to continuing stability in private consumption, such as purchases by credit cards, which rose by an annualized 4.2% in the second quarter. A slight improvement is emerging in business sector trend surveys from a very low level. The Bank of Israel expects 2.8% growth in the second quarter, after 2.7% growth in the first quarter," Katz says.
"It is not clear whether the Ministry of Finance's measures will persuade the Bank of Israel that fiscal policy is 'under control'. The Bank of Israel would prefer to wait and see the 2013 budget framework proposal and the government's decision on this matter. Moreover, additional monetary easing expected in the US (QE3), probably in September, will support an interest rate cut in Israel. We expect one interest rate cut by the end of the year."
As for the bond market, Leader advises reducing holding of Makams (short-term Treasury notes) because "it is hard to see an additional capital gain at current yields. The market has already priced in two interest rate cuts and a responsible fiscal policy. This situation seems a bit too optimistic to us."
Published by Globes [online], Israel business news - www.globes-online.com - on July 30, 2012
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