“The current situation demonstrates the strong resilience of the Israeli market despite the ongoing war”
Adi Shachaf, Executive Vice President, Head of Financial Division & Chief Financial Officer (CFO) at Mizrahi-Tefahot Bank, was speaking about financing the government deficit during wartime at Calcalist and Migdal's Investment and Finance conference
"Unlike during the COVID-19 period, we also have to account for the increased interest on the new debt and the refinancing of the existing debt," said Adi Shachaf, Executive Vice President, Head of Financial Division & Chief Financial Officer (CFO) at Mizrahi-Tefahot Bank, speaking about financing the government deficit during wartime at Calcalist and Migdal's Investment and Finance conference. "This will greatly cloud the coming years, as 40% to 50% of the existing debt will be rolled over at higher interest rates. This adds additional weight on the spending side. Therefore, in addition to adjustments in taxes and revenues, we will also have to see adjustments on the spending side."
Referring to the level of debt at the beginning of the war, Shachaf said: "We arrived at this situation in very good shape, with a debt-to-GDP ratio of 60%, similar to the situation when we entered the COVID-19 crisis. After distributing money, we reached 70% of GDP, and then we returned to 60% of GDP. Even if we reach 70% of GDP this time, the main difference is that today's interest rate environment is not zero, so all the additional debt will incur interest costs. The normal debt refinancing, which constitutes between 10% and 15% of the total debt each year, will also bear interest, making it difficult to manage expenditures."
Commenting on the state of the economy, Shachaf said: "Although the 10-year bond yield has increased, it is not a catastrophe. The current situation demonstrates the strong resilience of the Israeli market despite the ongoing war."
He attributes the strength of the economy to several factors. The first is "the near-perfect work by the Bank of Israel's markets division. Every month, the Treasury publishes a government debt raising plan, and a day or two later, the Bank of Israel publishes an MCM plan to allow the market to accommodate the excess issuances."
The second factor is the strength of Israel's balance of payments. "The balance of payments is very strong, leading to a situation where, even today, after nine months of war, the dollar exchange rate is lower than it was before the war. The stock market fell, but this is not a catastrophe. The market is showing many signs of strength. It is looking for reasons to rise and needs encouragement, especially in terms of addressing future budget expenditures."
Alongside the compliments on the market's strength and the functioning of the Bank of Israel and the Treasury, Shachaf implicitly criticized the government's budgetary priorities: "As soon as we see adjustments on the spending side, it seems that the yields on the bonds will go down again. It is perfectly fine for the deficit to increase during a war and for the debt to rise. In my estimation, the deficit will be higher than expected. There is nothing to do; war costs money, and we have to finance it. The market can accommodate a one-time expenditure of NIS 200-250 billion. However, the market doesn't like permanent additional growth, especially when there is an unwillingness to make necessary cuts."
