Israeli Central Bank Downgrades Economic Forecast as Coronavirus Bites

The Bank of Israel says the economy will contract 6% in 2020, a considerable cut from the 4.5% it had predicted at the end of May

Avi Waksman
Avi Waksman
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מס"עת קורונה היערכות כלכלית
Credit: Emil Salman
Avi Waksman
Avi Waksman

The Bank of Israel has sharply downgraded its 2020 forecast for the Israeli economy, warning that downside risks remain high amid a resurgent coronavirus pandemic.

The central bank kept its base lending rate at a record low 0.1% for a second month but announced it would begin to buy corporate bonds for the first time to help lower private-sector borrowing costs.

The forecast Monday came as the Finance Ministry reported that the budget deficit had swelled in June to 6.4% of gross domestic product from 6% in May.

The treasury confirmed reports that emergency aid was not being disbursed to counter the impact of the coronavirus, saying that less than half of the 100 billion shekels ($29 billion) allocated had been spent.

The Bank of Israel said GDP would contract 6% in 2020, a considerable downgrade from the 4.5% it had predicted at the end of May. The revised forecast assumed that no further lockdown measures would be taken, but just before the estimates were released, the government announced it was shutting down event halls, concert venues, nightclubs, bars and other public facilities, and limiting crowds at others.

“At the previous interest rate discussion, we hoped that at the beginning of July most economic activity would be returning to normal. Currently, it appears that the health situation is becoming more severe and that the risk of additional deterioration in the economic situation has increased,” said the governor of the Bank of Israel, Amir Yaron.

The only encouraging news in the forecast is higher expectations for an economic rebound in 2021. The central bank said it now expected GDP to grow 7.5% next year, faster than the 6.5% it had predicted in May.

The Bank of Israel said it would begin purchasing 15 billion shekels of corporate bonds, adding to its previously announced program of buying government bonds. The news sent the Tel Aviv Stock Exchange’s Tel-Bond 20 index up nearly 2%. The blue-chip TA-35 stock index closed 2.5% higher at 1,392.86 points.

The bond-buying program will be limited to corporate bonds rated A-minus or higher. It will not include foreign companies’ bonds, bonds with an equity component or bonds that are not indexed to the shekel and are not fixed-rate. The central bank estimated that even with the restrictions, its program would cover 75% of the 340-billion-shekel Israeli corporate bond market.

In addition, it said it was reviving a program to provide the banking system with fixed-rate loans at an interest rate of 0.1% for three years, with the aim of increasing credit to small businesses and helping them get through the coronavirus crisis.

The original program launched in April had expired in May. This time, it will remain in effect until the central bank acts to cancel it.

The treasury reported that in shekel terms, Israel’s budget deficit ballooned to 58.2 billion shekels in the first half of the year from 22 billion the same time in 2019. The Finance Ministry said government spending rose 8.9% year on year, but without 16.4 billion shekels in dedicated coronavirus spending, the figure was actually down 0.9%. Defense spending dropped 4.9% in the first half.

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