The Israeli government will have to employ "a long series of stern measures to make sure that the situation does not get out of control," should the deviation of the 2019 budget deficit from the target and the projected 2020 budget deficit prove to be permanent, not temporary, Bank Hapoalim chief economist Leo Leiderman said today.
Speaking at the annual economic conference of the Association of Publicly Traded Companies, Leiderman said that an economy with good economic data like that of Israel could afford a temporary deviation of the budget deficit from the target, but added, "Maintaining fiscal credibility requires full disclosure of the deficit figures and forecasts for 2020, and the presentation of alternatives for rectifying the situation for implementation both this year and next year, after the state budget for 2020 is formulated."
"International experience shows that a loss of fiscal discipline is usually accompanied by depreciation in the local currency, a rise in medium and long-term bond yields, a higher country risk premium reflected in credit default swap (CDS) margins, and a credit downgrade of the country by the rating companies," Leiderman declared, but went on to say, "In contrast to this description, the capital and currency markets in Israel were almost unaffected by the news of the fiscal hole this year amounting to NIS 15-20 billion. In practice, the shekel continued to strengthen against the dollar and the euro, and the yield to maturity on 10-year government bonds fell to 1.63%. Furthermore, the news of the financial hole did not detract from investors' confidence in the government's ability to repay the bonds it issued." Leiderman pointed out that Israel's country risk, as shown by its five-year CDS spreads, was 68 base points, compared with 12 base points in Germany, 32 base points in Canada, 218 base points in Italy, 294 base points in Greece, and 449 base points in Turkey.
According to Leiderman, the main explanation for this unusual phenomenon is that "the starting conditions of the Israeli economy are very good": an economic growth environment of 3% a year, with low inflation, and a relatively low 61% ratio of public debt to GDP. Leiderman said that Israel's debt-GDP ratio was far below the 104% average in developed countries, particularly in comparison with countries like Japan (238%) and Italy (134%). The average ratio in the euro bloc is 84%.
Another explanation cited by Leiderman is "the consensus that the problem of the increase in the budget deficit would be addressed by the government to be formed after the elections in September." Leiderman also mentioned that Israel had a fairly high credit rating of AA minus from S&P, and had never defaulted on its government debt. He commented, however, that the high rating and confidence enjoyed by the Israeli government in international markets were not attributable solely to good economic data; they also resulted from "the expectation that the next government would take credible steps to restore budgetary discipline."
Published by Globes, Israel business news - en.globes.co.il - on June 12, 2019
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