Isranomics

UBS Forecasts Shekel Turbulence, Moderate Impact on Oil Market

by | Oct 5, 2024 | Economy | 0 comments

The Israeli economy, reeling from the recent geopolitical upheavals, faces an uncertain future, particularly with the shekel showing continued volatility. A report from Swiss banking giant UBS outlines three potential paths for the shekel in the wake of the conflict that erupted on October 7, 2023, with each scenario hinging on the direction of the war and its long-term impact on the country’s economy.

According to UBS, the Israeli economy is navigating through significant challenges. The continued conflict has led to disruptions in the capital markets, with the shekel and government bonds bearing the brunt. Moody’s and S&P recently downgraded Israel’s credit rating, signalling major concerns about the long-term consequences of the conflict.

UBS has mapped out three key scenarios for the shekel’s exchange rate against the U.S. dollar:

A Complete Ceasefire: The most optimistic outlook predicts a quick recovery, with the dollar-shekel exchange rate dropping to around NIS 3.4-3.5.
Gradual De-escalation: If hostilities diminish gradually, the exchange rate could hover between NIS 3.6-3.7, aligning with previous forecasts from the Bank of Israel.
Prolonged Conflict: In the worst-case scenario, where the conflict spreads to additional fronts such as Lebanon and persists until the end of 2025, the shekel could fall further to NIS 3.9 per dollar.

Currently, the shekel sits at approximately NIS 3.81 to the dollar, already reflecting the market’s apprehension.

In addition to currency concerns, the report highlights Israel’s ballooning budget deficit, which has surged in recent months. The government aims to reduce the deficit to 4% next year, a goal some analysts view with scepticism. Increased defence spending, projected to rise by 1-2% of GDP across all scenarios, will require further budgetary adjustments in the years following 2025.

While the situation is dire, UBS notes some positive factors that could help stabilize the shekel. One key factor is the demand for shekels from institutional investors, which could resurface once geopolitical tensions ease. UBS also points to Israel’s healthy foreign exchange reserves, which could enable the Bank of Israel to intervene if necessary.

Oil Prices: Moderate Impact Expected

On the global stage, concerns about a potential disruption in Iranian oil exports have stirred speculation about rising oil prices. However, UBS suggests that any increase will be moderate, largely due to the surplus production capacity of OPEC+. With OPEC+ holding an excess capacity of approximately 6 million barrels per day – far exceeding Iran’s total production and exports – the group could compensate for any potential shortfall.

While the geopolitical tensions could have a modest effect on global oil prices, UBS estimates that this would only lead to an increase of a few dollars per barrel, thanks to the ample spare capacity in the market.

Photo: MICHAEL BUHOLZER/SHUTTERSTOCK

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