Foreign-currency debt ratio expected to decline

The proportion of Israel’s foreign-currency debt is likely to continue to decline in the coming years as the government increasingly turns to the local bond market for funding, Accountant-General Michal Abadi-Boiangiu said.

While Israel’s policy would still be to try and tap global markets every year, alternating between dollar- and euro-denominated bonds but dependent on market conditions, the main focus will be on the local market, she said.

Over the past decade, foreign debt has slipped to 13% of total debt from 25%, even as the size of overseas issues has grown. Some 60% are in Israeli tradable bonds, mostly split between fixed rates and inflation-linked rates.

“We are financing most of our needs in the very deep and liquid domestic market,” Abadi-Boiangiu told Reuters. “If the issuance policy will remain the same, meaning that we will issue abroad once a year, since the local market is very deep... the proportion of foreign debt will tend to be lower than 13%.”

In 2016, Israel’s debt grew to NIS 740.8 billion ($195.8b.) from NIS 727b. in 2015. Of that, foreign debt accounts for about $30b.

Earlier this month, Israel sold €1.5b. of 10-year bonds and €750 million of 20-year bonds, the first time it had ever sold paper over 10 years outside of the country. The offering, Israel’s largest ever abroad, was four times oversubscribed.

Finance Ministry officials believe that while there is no pressing need to sell bonds globally, it does so for benchmark reasons and to expand its investor base. Israel also raises about $1.2b. a year from Jewish communities around the world.

Israel sold some NIS 60b. of bonds locally last year in weekly auctions to its 13 primary dealers. Among them are six foreign banks, including Goldman Sachs, Barclays, Citi and Merrill Lynch. The ministry foresees a similar amount in 2017.

Since Abadi-Boiangiu, who steps down next week, took over as accountant-general in 2011, Israel has expanded the average time to maturity of its debt to 7.5 years from 6.3 years, mainly by taking advantage of low interest rates to issue 30-year bonds. Previously, its longest bond was 20 years.

“Looking at the future, the government will benefit because the interest expenses in the budget will be relatively low for a long time,” Abadi-Boiangiu said, noting the percentage of interest expenses in the budget in GDP terms has fallen over the past few years.

Israel has a relatively low debt rollover ratio of 9% a year as the ministry tries to keep annual bond redemptions at about NIS 75b. to NIS 80b. a year.

Helped by deflation and a low budget deficit, Israel’s debt fell for a seventh straight year in 2016 to 62.1% of GDP from 63.9%. That is well below a euro-zone average of 92% but above its peer group of similarly rated countries of 47%.

Its ratio has fallen from 80% 10 years ago, and Abadi-Boiangiu noted the decline strengthens the economy and provides the government with more funds to encourage growth.

Israel is rated A1 by Moody’s Investors Service and A+ by Standard & Poor’s and Fitch Ratings. (Reuters)