The IsraTransfer Report - July 2019

Updated: Aug 5, 2019


The downward trend in Israel's housing starts continues into June, plus strength in the shekel punishes the USD/NIS, and a rising fiscal deficit could pave the way for tax increases.


From the IsraTransfer Trading Desk


There may be no bigger ally to Israel than the United States, however, its economy was hardly a good friend to the USD/NIS in the month of June.  After beginning the month over 3.62, negative fundamental pressure and technical stresses on the American currency took a serious toll on the exchange rate, dropping it to 3.56, before the month mercifully came to an end hovering around the 3.57 level.


The US Fed's somewhat surprising change in sentiment when it comes to intervention last week, including a preference not lower interest rates, might not be the best news for those hoping for a renewal in short-term US dollar strength.  Moreover, remarks from US President, Donald Trump, at this past weekend's G-20 Summit stating he's in no rush to end its trade war with China simply created more uncertainty as the year long conflict between the two global super-powers wages on.  If that wasn't enough to keep everyone on their toes, President Trump reversed course once again a day later, reopening lines of communication and pledging no further sanctions against China in exchange for an increase of purchases US agricultural products.


Curiously, the ongoing conflict presents an interesting challenge for Israel, as it continues to maintain the delicate balance in its relationship with the two nations.  While the US has clearly established itself as one of the Israel's staunchest supporters, its economic ties to China can not be overstated.  Considering its high level of involvement in Israel's infrastructure development and a buyer of its technology products and services, the shekel is hardly insulated from all the daily back and forth.

On the domestic economic front Israel's economy could also find itself mired in plenty of uncertainty itself given the latest dose of mixed data just released by its Central Bureau of Statistics.  On a positive note inflation remains low, conditions in the employment market appear favorable, and the country's credit rating continues to remain strong.  Conversely, all the political strife and uncertainty in the government is definitely having a negative effect on the economy.  Add in a ballooning fiscal deficit that may require the next government to take some aggressive measures to resolve (more on this later), and it's hard to believe that the shekel has much room for further strengthening in the face of such adversity.

With a weaker US dollar already upon us, and with what you would think should be reduced shekel strength up the road, it will be interesting to see which one firms up first.  Consequently, based on the USD's standing as the world's safest currency, our expectation would be that it does first, resulting in limited upside on the USD/NIS in the next month of trading.



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Finally, in sterling trading things are looking as uncertain as ever, as the battle for the new leader of the Conservative party and the chance to become the next UK Prime Minister enters its final stages.  Currently, Boris Johnson is looking like the odds-on choice to lead the UK through its next attempt at a Brexit resolution, as it heads towards its next deadline of October 31st.  

Unfortunately for sterling, the continued speculation and chatter of a No Deal Brexit continues to weigh on the currency, and the longer the uncertainty lingers, the longer sterling will suffer.  While Johnson has declared that a No Deal Brexit is a "million to one chance," we have heard this kind of rhetoric before, and will believe it when we see it. Therefore, we expect another month of volatility in GBP, and thus recommend taking advantage of "up days" to convert funds to shekels.


Keeping It Real


Israel's home prices may be on the rise to the tune of 1% over the past year, however, the same cannot be said about another key economic indicator.  A recently released report from the Central Bureau of Statistics showed a drop in new housing starts by 2.1% from the period of April 2018 through March 2019.  Additionally, the numbers revealed a trend of an average decline of nearly 4.5% per quarter in new housing inventory since the fourth quarter of 2018, with signs pointing towards a continuation going forward at least for the foreseeable future.

Per the data, the Tel Aviv district led the list of housing starts accounting for nearly a quarter of all new units spanning the yearly period.  Overall, Israel's central district accounted for more than 22.5% of nationwide housing starts, while the southern district came in at just over 15%.  Meanwhile, Jerusalem posted a total of 2,370 new units, representing an increase of 5% over the same year-long period.  On the flip side the news was beyond less-than-stellar for both Rishon Lezion and Haifa, which each saw the number of new housing units in their cities cut in half, along with Ra'anana, Rehovot, Bnei Brak, and Netanya, who also experienced declines.

While the number of new construction projects may be stalling in the present, that number could take off in a hurry should the government get its way.  With Israel's population now the fastest growing in the developed world according to the Central Bureau of Statistics, boasting an annual increase of 2%, the current 9 million people living in the country is on-track to skyrocket to over 17.5 million by 2040.  As a result, Israel's housing supply is slated to get a major boost, with over 1.5 million new homes planned.

Not surprisingly, the vast majority of these new dwellings are expected to be built in the already crowded Tel Aviv area, as well as some other of Israel's centrally located cities.  Opposition to the plan, a majority of whom being mayors from other municipalities, argue that the region will not be able to sustain such a magnitude of residential construction based on a lack of infrastructure alone.  Alternatively, the call has gone out for a bulk of these new projects to be re-allocated towards the development of both the Galilee and Negev.

As things stand now, should the distribution of the population remain as it is today, and the projections for its growth come to fruition, Israel could be looking at nearly 75% of its total territory inhabited by only 25% of all Israelis.  Critics argue that allowing this to happen will not only result in the creation of an affordable economic center, but will also widen the already growing socioeconomic gaps that currently exist.  Consequently, organizations such as the Israel 2048 group are hard at work in their efforts to develop the full potential of both Negev and Galilee regions in the hopes of them being able to support up to 7 million people by 2048, and thus preserve the quality of life for all Israelis countrywide.


Tax All Folks...


When it comes to spending, it may be officially time to tighten the belt for the Israeli government, especially after posting a fiscal deficit on target to exceed 4.5% of GDP.  In fact, as far as Bank of Israel Governor, Dr. Amir Yaron, is concerned simply cutting alone and curtailing tax exemptions won't get it done either, calling for government ministers to actually raise taxes at a recent cabinet meaning.  In fact, the head of Israel's central bank even warned that delaying a tax hike, in addition to budget cuts, could send a negative message to the financial markets in general.

Even before Yaron's input regarding taxes, the government had taken a pro-active stance by announcing plans to trim over 1.2 billion shekels from the budget across-the-board in sweeping cuts that will affect all government ministries.  Some initiatives that found themselves safe from the chopping block, however, included the financing of a defense project, as well as subsidies for afternoon child care in the next school year.  Additionally, and thankfully, the government also added a last-minute cut of 84 million shekels to assist in providing financing for victims of the tragic fire in Mevo Modi'im, the renowned moshav made famous for being the former home of the late, legendary, Rabbi Shlomo Carlebach.

Ok, consider yourself back in the know.  Wishing everyone a very productive and prosperous month of July!

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