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Written by Galit Altstein
Israel will have to sell near-record amounts of debt this year to finance its war against Hamas, according to Treasury officials familiar with the matter.
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On Friday, Israel’s credit rating was downgraded for the first time in history, further complicating the task. Moody’s Investors Service downgraded the government by one notch to A2. While Israel remains well within investment grade, now on par with countries such as Iceland and Poland, the move highlights the economic toll the conflict is taking on the country.
The government is likely to rely heavily on the shekel bond market to increase issuance, said financial officials, who spoke on condition of anonymity to discuss sensitive issues. But it plans to sell more foreign currency bonds, particularly through private transactions.
Israel is facing increasing pressure from the United States and other countries to scale back its operations in the Gaza Strip and alleviate the suffering of Palestinian civilians. But fighting continues to intensify, and the Israeli military says it may take until next year to reach its goal.
In announcing the downgrade after markets closed this week, Moody’s said a war “significantly increases political risks for Israel, as well as weakening its executive, legislative, and fiscal strength.” “Israel’s debt burden will increase significantly compared to pre-conflict projections.”
As fiscal costs mount, Israel is on track to run its largest budget deficit this century. Officials say the government will raise more debt in 2024 than in any other year except 2020, when it was forced to spend and borrow heavily to limit the impact of the coronavirus pandemic and lockdowns. It is said that they are planning to do so.
Private sector analysts agree. Total bond issuance is expected to be around 210 billion shekels ($58 billion), up nearly a third from last year, said Alex Zabedzinski, chief economist at Maytab DS Investments. In 2020, it was 265 billion shekels.
The main burden is on the domestic market, where authorities typically tap around 80% of their financing needs, making them less reliant on volatile foreign capital flows.
It’s a strategy focused on Israeli pension funds and other large institutional investors, who collectively manage nearly 3 trillion shekels in savings. That’s enough to stabilize Israel’s borrowing costs for at least the next six months or so, said Mozamil Afzal, chief investment officer at London-based EFG Asset Management.
foreign private debt
Government revenues have plummeted since civil war broke out on October 7, when Hamas attacked southern Israel from Gaza. And spending will jump by $19 billion this year because of increased defense spending and increased defense spending. This is no small amount for a $521 billion economy. Programs such as rebuilding destroyed villages.
Still, officials at the Comptroller General’s Office, which is responsible for managing Israel’s $300 billion debt balance, said they hope the military can scale back some operations and allow more reservists to return to duty. , believes that the economic burden will be eased.
Investors said they were optimistic about the country’s fiscal outlook based on recent meetings and conversations in the United States and elsewhere.
Officials said that while Israel’s rising defense spending is a cause for concern, feedback suggests that recent measures, including new taxes, should stabilize the debt-to-gross-domestic-product ratio in the coming years. .
Israel has not issued foreign currency bonds on the open market since the conflict began. Officials say there is no need to rush to act.
Instead, governments sold bonds in dollars, euros, and yen through private placements, usually bought by at most a few investors. These are arranged by banks such as Goldman Sachs Group Inc. and Deutsche Bank AG.
Israel carried out at least four such transactions in January, including three replenishments to existing euro-denominated securities and a rare Brazilian real-denominated bond repayable in U.S. dollars. In total, it generated about $1.7 billion in revenue and was part of overseas borrowings that could exceed $10 billion in 2024.
Domestic issuance in the first two months of this year is expected to total more than $9 billion, an increase of 350% from the same period last year.
Zabedzinski, an economist at Maytab in Tel Aviv, said Israel will need 125 billion shekels to cover its 2024 budget deficit and about 85 billion shekels to refinance maturing debt.
The Israeli market has stabilized after the turmoil caused by the first weeks of the conflict, and the shekel is now higher than its level at the outbreak of the conflict. Policymakers also cut interest rates last month.
Still, the government faces the difficult task of paying for the war, which the central bank estimates will reach about $70 billion, or more than 10% of annual GDP, between 2023 and 2025.
Israel’s 2024 budget, which is awaiting final approval by parliament at the end of this month, projects the budget deficit to be 6.6% of gross domestic product (GDP), an increase of more than 2 percentage points from 2023.
The shortfall could grow even larger if heavy fighting in Gaza drags on, or if near-daily skirmishes between Israel and Hezbollah militants in Lebanon intensify. Hezbollah and Hamas are both backed by Iran and are considered terrorist organizations by the United States.
If the war in Gaza continues at its current intensity for several more months, Israel’s ability to raise funds from domestic institutional investors “could certainly come under pressure,” EFG’s Afzal said. “In that case, Israel would have to rely on foreign funding sources, which would mean higher yields.”
The yield on the government’s 10-year shekel bond has risen nearly half a percentage point since late December, but remains below its peak of nearly 5% since the outbreak of war.
Israeli dollar-denominated public bonds trade at an average yield of about 5.6%, according to Bloomberg Index. Treasury officials told Bloomberg that the Brazilian sale would raise about $500 million worth of debt due in 2027 and pay investors a yield of about 5.3% in dollar terms. Told. This is cheaper than the cost of a pure dollar-denominated bond of the same maturity, they said.
Israel sells record $1 billion in retail bonds since war began
Over the next few weeks, investors will focus on the final version of this year’s budget after a vote in Congress, said Jonathan Katz, economic strategist at Leader Capital Markets.
Israeli credit default swaps rise again | Default insurance costs close to post-October 7 attack levels
Many bond traders are already pricing in a downgrade, which could limit the impact of Moody’s downgrade when global markets reopen on Monday.
Still, the cost of insuring against Israel’s default, as measured by credit default swaps, is now higher than that of lower-rated sovereigns such as Mexico and Indonesia, indicating that some investors are nervous. There is.
Israeli Prime Minister Benjamin Netanyahu says that should not be the case.
UAE, Jordan, Egypt, Saudi Arabia join in warning Israel
The United Arab Emirates and Jordan have also sounded the alarm over plans for an Israeli military operation in the southern Gaza city of Rafah, where more than 1 million Palestinians have fled amid ongoing military operations towards the Egyptian border. Joined the nations.
“Enough Israeli hostages remain alive to justify war in Gaza.”
Israeli Prime Minister Benjamin Netanyahu said in an interview aired on Sunday that there are “enough” of the 132 remaining Israeli hostages being held in the Gaza Strip to justify Israel’s ongoing war. He said he was alive. Asked how many of the hostages were still alive, Prime Minister Netanyahu said: “There are enough to justify the kind of effort we are making.”
“We’re going to do everything in our power to recover the bodies of all the living and, frankly, the dead,” he said in an interview on ABC’s “This Week.”
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