BoI admits crisis goes beyond its stress scenarios

Amir Yaron  / Photo: Rafi Kotz, Globes
Amir Yaron / Photo: Rafi Kotz, Globes

The Bank of Israel warns of a high level of vulnerability on the macro-economic level, in the credit market an din asset prices.

The crisis caused by the coronavirus pandemic presents a medium to high risk to stability in the economy, the Bank of Israel states in its Financial Risk Report for the first half of 2020, released today (part of the report, on the banks, was released last week). The bank warns of a high level of vulnerability on the macro-economic level, in the credit market, and in asset prices. It says that the pandemic and its consequences present unprecedented challenges in aspects of support for economic activity and maintenance of the stability of the financial system. In fact, the central banks admits that the challenge to the financial system "appears to have even gone beyond the stress scenarios selected over the years for the banking system." Among other things, the Bank of Israel warns of a substantial hit to the profitability of the banks as a result of credit losses, and points out that NIS 50 billion of financial debt is associated with companies that are expected to encounter liquidity difficulties in the event of further worsening of the pandemic and of the economy.

The Israel economy entered the crisis in a fairly good position, with unemployment at a historical low and high rates of growth, but the effect of economic activity is considerable and is expected to lead to negative growth of 6.8% in 2020 and unemployment rates ranging between 10% and 15%. On the fiscal front, tax revenues were down NIS 24 billion in the first half year, and the Bank of Israel sees the fiscal deficit reaching 13% of GDP at the end of the year. In the period March-July, the government raised some NIS 42 billion in Israel and NIS 46 billion overseas. So far, the bank says, the debt raising has gone smoothly. The local market has absorbed the rise in government fund raising well, and, as far as the credit rating agencies are concerned, since it is a matter of a global crisis, the sharp rise in government debt in relation to GDP is not unique to Israel, and it therefore seems that there is a forgiving attitude to the rise on the part of the raing agencies and the markets, the report says.

On the banking system, the Bank of Israel's report states, "The Israeli banking system was in a good position at the start of the coronavirus crisis. The banks’ credit portfolio has grown in recent years and has undergone a change in composition that reduced the banks’ credit risk. However, the coronavirus crisis is expected to bring about a realization of both market risk and credit risk, which would lead to a drop in the banks’ profitability and an increase in expenditure for loan losses. On the other hand, the liquidity of the Israeli banks is at a high level and is based on stable and dispersed retail deposits.

"The increase in the risk of business credit is primarily centered on industries that are more exposed to the crisis, including real estate companies, which account for a high share of business credit. In the financial statements for the first quarter, the banks increased their allowance for credit losses to rates of up to 1.42 percent of their credit portfolios."

The report says that banking regulators drew lessons from the financial crisis of 2008 and that he steps taken subsequently led to safer system, which has helped it to get through the current crisis despite the heavy pressures in the market. The forecast credit losses, however, will hurt the banking system's capital, and that, together with an interest rate environment that will remain very low in the coming years, will erode the commercial banks' profit margins and lead to difficulty in raising capital, and greater risk to the banking system in the medium term.

"At the peak of the crisis, bond prices reflected a pessimistic outlook, according to which about one-quarter of the companies would not be able to repay their debts according to the terms of their bonds and would default," the report states.

After the Bank of Israel; announced on July 6 that it would buy corporate bonds in the secondary market to the tune of NIS 15 billion the corporate bond market responded with sharp rises. Public companies that are expected to face liquidity problems or a significant reduction in their capital in the extreme scenario have financial debt of about NIS 50 billion. Nevertheless, the report says, "about 70 percent of the 286 public companies that were analyzed are not expected to experience any cash flow problems and/or a serious threat to their capital in 2020, even in a scenario of a return to the stringent restrictions that prevailed in the economy at the beginning of the crisis."

Published by Globes, Israel business news - en.globes.co.il - on August 11, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Amir Yaron  / Photo: Rafi Kotz, Globes
Amir Yaron / Photo: Rafi Kotz, Globes
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