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Israel's foreign debt ratio expected to continue declining

By Steven Scheer

JERUSALEM (Reuters) - 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, a senior Finance Ministry official said.

Accountant General Michal Abadi-Boiangiu said that 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 would be on the local market.

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

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"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 percent."

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

Earlier this month, Israel sold 1.5 billion euros of 10-year bonds and 750 million euros 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.

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 $1.2 billion a year from Jewish communities around the world.

Israel sold some 60 billion shekels of bonds locally last year in weekly auctions to its 13 primary dealers. Those include six foreign banks such as 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," she said, noting the percentage of interest expenses in the budget in GDP terms has fallen the past few years.

Israel has a relatively low debt rollover ratio of 9 percent a year as the ministry tries to keep annual bond redemptions to about 75 billion to 80 billion shekels a year.

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

Its ratio has fallen from 80 percent 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.

(Reporting by Steven Scheer, editing by Larry King)