Goldman Sachs and UBS see shekel gaining sharply

The ceasefire agreement between Israel and Lebanon has seen investment banks and rating agencies issuing more positive forecasts for the Israeli economy.

The ceasefire agreement between Israel and Lebanon, which came into effect last week, has resulted in investment banks and rating agencies revising their forecasts for the Israeli economy. Some of these organizations have presented especially positive updates, which include a significant strengthening of the shekel and an improvement in Israel’s credit rating. On the other hand, others see a more complicated picture.

Since talks began on a potential agreement, the markets have been indicating enormous positivity. Israel’s risk premium, as measured by the CDS index, has been falling sharply, the Tel Aviv Stock Exchange has been consistently rising, and the shekel appreciated 1.6% last week against the basket of the main currencies.

UBS issued a special report for investors in order to analyze the impact of the Israel-Lebanon ceasefire, entitled, "Lebanon-Israel ceasefire, where do we go from here?" UBS analysts believe, "The ceasefire agreement indicates a major reduction in geopolitical tensions between Israel and Lebanon." They expect that if the ceasefire holds, we will see a significant strengthening of the shekel against the US dollar. If the shekel-dollar exchange rate is currently NIS 3.64/$, according to UBS’s forecasts it will reach NIS 3.4-3.5/$. This assessment, they say, depends on a situation in which there is a ceasefire on all fronts in the war.

Also in this scenario, Israel’s credit rating will gradually begin to improve. Currently, all three major international ratings agencies have cut the country’s credit rating and given a negative outlook for Israel. In other words, the expectation is for matters to get worse. But the Swiss bank now sees expectations changing direction. "A positive outlook is on the table from the second half of 2025."

UBS adds, "The ceasefire reduces the fiscal risk for Israel. The high costs of the military campaign in the north hit budget forecasts but the new stability allows better control of defense spending."

Due to the fall in risk, UBS estimates GDP growth of 3.8% in Israel in 2025 as looking more realistic, although, "The government could cut the budget reduction plan for next year, which is estimated at 1.8% of the GDP."

However, UBS expresses concern that the ceasefire won’t hold but pins hopes on the involvement of the US and France improving the chances of success for the agreement compared with previous initiatives.

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Goldman Sachs: "The shekel is not expensive"

Like UBS, investment bank Goldman Sachs has also presented a positive forecast for Israel, especially the shekel. In a report dealing with the global forex market, Goldman Sachs said, "The geopolitical developments in the Middle East continue to be the main factor affecting the US dollar-shekel exchange rate. The declaration of a ceasefire in Lebanon this week has positioned the shekel as one of the leading currencies in its performance."

Goldman Sachs believes that the shekel is likely to strengthen further. "It is still not expensive," the report says, "The macroeconomic fundamentals indicate potential for a further strengthening of the shekel, if Israel’s risk premium continues to fall."

The bank forecasts that the shekel-US dollar exchange rate could appreciate to NIS 3.30/$ - NIS 0.35 less than its current level.

The ratings agencies are more skeptical

Ratings agencies Fitch and Moody's also issued reports on Israel's economy in the wake of the ceasefire agreement. Fitch wrote that Israel’s ceasefire with Hezbollah, if it holds, will reduce fiscal risks, but developments in Gaza and Iran will still play an important role in determining Israel's fiscal and economic trajectory. Fitch believes that the war in Gaza will continue into 2025, albeit at varying levels of intensity. This suggests continued high spending on immediate military needs and disruption to production in the border areas, as well as tourism and construction."

On the deficit, the ratings agency expects a budget deficit of 7.8% in 2024 and 5.2% in 2025. This compares with forecasts of 7.8% and 4.6%, respectively, in its report published in August.

Moody's, which sharply cut Israel's credit rating this year to BBB+, also issued an updated report in which it stressed that the ceasefire between Israel and Hezbollah reduces one source of geopolitical risk, while others remain unchanged. The bottom line is that there is a consensus that the ceasefire on the northern front is easing the pressure on Israel’s economy and reducing risks. However, in general, the agencies emphasize the remaining risks, including the war in Gaza and tensions with Iran. While UBS presents a more optimistic outlook, Moody's prefers to take a more cautious approach.

Published by Globes, Israel business news - en.globes.co.il - on December 1, 2024.

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