Israel's debt: GDP ratio is set to beat the forecasts and to shrink to 60%-61% in 2022, sources familiar with the matter have told "Globes." The figure reflects a significant fall from the 68% debt: GDP ratio in 2021 and a return to pre-Covid pandemic levels.
The final official figure for 2022 won't be published by the Ministry of Finance until January but the indices already show a clear picture: the debt: GDP ratio has shrunk from both sides of the equation. Annual GDP has grown by an estimated 6% in 2022, while the budget surpluses recorded this year have allowed the Accountant General in the Ministry of Finance to avoid raising the new debt that would have been required in a deficit situation.
In October 2022, the Bank of Israel published a macroeconomic forecast, cutting the debt: GDP ratio forecast for the end of this year from 66% to 65%. The central bank also predicted that only in 2023 would the ratio fall to 63%, compared with 64% in its previous estimate. In practice, the figure for 2022 will be even better than the improved forecast for 2023. Every single percent in the debt: GDP ratio is equivalent to about NIS 16 billion.
For the first time Israel set for budget surplus
2022 is set to be the first-ever year in Israel's history that the country records a budget surplus. According to the Ministry of Finance, in the first 11 months of 2022, there was a NIS 28.9 billion surplus in government revenues over expenditure.
In the latest data published by the Ministry of Finance chief economist, the forecast for government revenue in 2022 is NIS 456.6 billion - NIS 45.5 billion higher than the original forecast, after government revenue reached NIS 427.9 billion in the first 11 months of the year, which would see actual revenues reaching NIS 466 billion.
At least some of the many plans of the leaders of the incoming coalition to make use of these rare budget surpluses, gained this year by the Ministry of Finance, will fail. The reason: the huge surpluses have already been allocated by the Ministry of Finance to reduce the debt, in accordance with the fiscal rules. The tens of billions in revenue, not foreseen by the chief economist, are used to finance the debt when there is no deficit. Despite the plus in the state's balance sheet in 2022, the national debt weighs into it the total deficits of previous years and still hovers around one trillion shekels
Strengthening the country as a slowdown approaches
About half of Israel's debt is linked to the consumer price index (CPI), which climbed to an annual rate of 5.3% in November, swelling Israel's total debt by about NIS 26 billion. This is another reason for the importance that the Ministry of Finance sees in reducing the debt: GDP ratio. The higher the debt, the higher the interest expenses on it. Today, Israel pays more than NIS 40 billion a year just for servicing interest on the debt.
The debt: GDP ratio is one of the main considerations in determining Israel's credit rating, by the major rating agencies. When the GDP is significantly higher than the debt, the risk that the country will not meet its obligations is low and its credit rating is high. A high credit rating makes Israel's bonds safe in the eyes of the world market and gives the country the ability to raise debt at low interest rates and spread over many years.
Cutting the debt since 2020 is reflected in the reports of the world's rating agencies. In April, Moody's upgraded Israel's rating back up from "Stable" to "Positive" and last month S&P ratified Israel's AA- rating and left the forecast on "Stable."
Over recent decades, Israel's economy has received frequent warnings from the ratings agencies about its high debt: GDP ratio. Now, with a figure falling towards 60%, the gap between Israel and the reference countries in the OECD has narrowed.
Other countries that entered the Covid crisis with a high debt: GDP ratio found it difficult to respond to the economic and medical consequences of the pandemic, while the Israeli government was able to benefit from "oxygen" through Covid assistance financed by the Accountant General through raising debt.
This is important even now, when the economic slowdown is already being felt in Israel and around the world. On Sunday, the Central Bureau of Statistics revised downward its estimate of GDP economic growth in the third quarter to an annualized rate of only 1.9%. The declines in capital markets and the waves of layoffs in the economy raise the likelihood that next year, revenue surpluses will be just a distant memory.
During the Covid pandemic, there was harsh criticism from economists, including within the Ministry of Finance, about the government's "addiction" to raising debt for ostensibly extravagant needs. But now the decline in debt: GDP ratio provides greater flexibility as the slowdown bites.
Bottom line, Israel's new government will receive a debt in good standing. But if it chooses to continue reducing the debt, there will be quite a few disappointed ministers and MKs unable to keep their promises to the public.
Published by Globes, Israel business news - en.globes.co.il - on December 20, 2022.
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