The ongoing conflict between Israel and Hamas in the Gaza Strip and the complex situation on Israel’s northern border mean that the Israeli economy faces considerable uncertainty, as reflected in several indicators. For example, direct conflict between Israel and Iran contributed to the depreciation of the shekel, pushing the risk premium on CDS to its highest peak in more than a decade. By contrast, the shekel soared during Passover, which ended on Monday, as talk of a ceasefire with Hamas and the release of Israeli hostages spread, and the Tel Aviv Stock Exchange, which resumed operations yesterday, rose. . Major indexes rose on the news of the agreement.
With the help of three senior analysts, we sketched out what would happen to the local economy in each of the following scenarios. Conclusion of armistice agreement and exchange of prisoners. Further escalation, including large-scale Israeli military operations in the Gaza Strip. The conflict has not escalated significantly, a ceasefire has not been agreed, and the situation remains as it is.
1. The agreement could strengthen the shekel.
One of the primary and most responsive barometers of sentiment towards the local economy is the shekel-dollar exchange rate. Despite the shekel’s sharp appreciation in recent days amid talk of a deal with Hamas, the shekel-dollar rate still carries a high risk premium. So far this year, the shekel has fallen 4% against the dollar.
Before 2023, the shekel was one of the world’s strongest currencies, but it depreciated last year as a result of the government’s judicial reform plan and the violent reaction to it, even before the outbreak of war.
According to various calculations, the shekel-to-dollar exchange rate incorporates a risk premium of approximately NIS 0.30. The evidence for this can be seen in the forecast released by Bank of America a few days ago. The forecast predicts that the shekel will gradually appreciate in the coming quarters, with the shekel-dollar rate reaching NIS 3.5/$ by early next year. The uncertainty that prevails in Israel will be reduced. The current rate is around NIS 3.73/$.
“Until the end of last week, markets had not priced in the possibility of a ceasefire and hostage agreement between Israel and Hamas,” said Modi Shahril, chief financial market strategist at Hapoalim Bank. ” he said. As a result, the shekel continued to depreciate against a basket of currencies, and Israel’s risk premium increased. ” Shahrir pointed out that the main factor weighing on the Israeli market’s performance recently is the escalation of the conflict with Iran, which has raised concerns of a regional conflict. Over the past two weeks, those concerns have eased somewhat as markets have come to realize that a renewed conflict with Iran is unlikely, but at the same time a deal is unlikely.
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“With U.S. Secretary of State Blinken flying around the Middle East, if an agreement is reached to release the hostages, the normalization of diplomatic relations between Israel and Saudi Arabia could come back to the table. It will lead to a corresponding decline, and it will lead to a strengthening of the shekel,” Shahrir said.
On the other hand, if negotiations on a hostage release agreement break down, the shekel could return to its previous downward trend, but the risk premium would rise, he said. The big question is, how much? Shahrir said this trend would not be strong in any case due to the high shekel-dollar rate and high risk premium. He added that any assessment of the impact of the Rafah attack was difficult because “it depends on the headlines around the world and the operation itself.”
Yonnie Fanning, chief strategist at Mizrahi Tefahot Bank, explained that the global foreign exchange market showed very high pressure in April and that this was not just a local phenomenon. “It was a phenomenon that occurred across markets around the world. You saw it in the risk premium in the oil market and in the appreciation of the dollar against a basket of currencies because of global tensions. , Israel and Iran were very high,” Fanning says. In his view, an agreement between Israel and Hamas would significantly strengthen the shekel. He believes that if a deal is reached, a rate of NIS 3.65/$ could definitely be achieved.
2. The stock market won’t calm down anytime soon.
Last year, and this year to date, the domestic stock market has underperformed compared to the world’s major markets. So far this year, the Tel Aviv 35 Index is up about 3%, while the S&P 500 has returned nearly double that. How will the ceasefire affect the stock market?
Jonathan Katz, chief economist at Leader Capital Markets, said: “The strength of the rally will depend on the nature and substance of the deal and whether it is durable and sustainable.” Deaf,” he said. He said the return of the hostages and a long-term ceasefire scenario would also lead to understanding in the north and calming of the situation. “If we get a ceasefire in the south, there will be no need to go into Lebanon and open a new front. Once the market understands that, this will be a positive scenario,” he said, adding that the market rally He added that it would be across the board. And it will happen in the stock market as well, with the shekel rising and the Israeli risk premium falling.
Katz says Israeli stocks have suffered a double blow. “Social unrest and judicial reform programs in early 2023 have led to a negative horizon for the market since before the war, and a negative outlook for rating agencies. Add to this the geopolitical tensions since October last year. I don’t think we can close this gap because it stems from additional factors that won’t necessarily go away. ”
Meanwhile, Hapoalim Bank’s Shahril doesn’t expect any sudden movement either way. “Stock markets tend to be sensitive to geopolitical events, so they will be affected by that,” he says. “Nevertheless, the Israeli stock market has been depressed since the beginning of 2023, and given the high level of tension that is already prevailing, it is unclear whether there will be a significant impact on the market.”
Fanning also doesn’t think the stock market will skyrocket any time soon. “In general, the stock market is linked to the foreign exchange market. However, the risk premium remains high, so investors are not rushing back to the Tel Aviv Stock Exchange.”
3. Expanding the budget deficit will make it even more serious
According to estimates by the Ministry of Finance and the Bank of Israel, Israel’s fiscal deficit in 2024 will be 6.6% of GDP. However, even more pessimistic predictions are being made in financial markets, predicting a deficit of up to 8% under current conditions. International organizations and the Bank of Israel have both said that a serious escalation in the security situation, including an all-out war in the north, would derail forecasts.
Mr. Shahrir emphasized the importance of aid, saying, “We received a large aid package ($26.4 billion) from the United States. It will help Israel’s financial situation.” Nevertheless, “a significant escalation could increase Israel’s risk premium and budget deficit.”
Katz, who worked in the Treasury Department’s budget division in the distant past, explains that the deficit is influenced by three unknown factors. The first is U.S. aid, which had been held up in the hallways of the Capitol but was recently approved by Congress.
“The second unknown is the opening and intensification of the Northern Front. Such an event is not budgeted for and could lead to a sharp increase in government spending. A ceasefire would remove that threat and, of course, reduce the budget deficit. “That would be a plus,” Katz said.
The third tier is the possibility of post-war economic recovery. Katz said the Israeli economy has been doing well so far, and further strengthening could increase tax collections and reduce the revenue deficit.
Published by Globes, Israel Business News – en.globes.co.il – on May 1, 2024.
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