9.10.2005
 
The government debt in the first half of 2005
 
  The government debt/GDP ratio went down in the first half of 2005, and at the end of the half-year stood at 102 percent, significantly higher than the average ratios of 76 percent in the OECD and 79 percent in the EU.
  Interest payments in Israel constituted 6.7 percent of GDP in the first half of the year, a high figure relative to those in the advanced economies––an average of 1.9 percent in the OECD countries and 2.9 percent in the EU in 2004. The main reason for the high ratio in Israel is the high level of government debt.
  It is important that the government rapidly implement its program to increase the proportion of unindexed debt, lengthen the period to maturity, and stop issuing debt at floating interest.
  The Bank of Israel's Monetary Department advises that total government debt at the end of the first half of 2005 was NIS 544 billion, showing no real change from the level at the end of 2004. The balance of domestic debt in NIS terms declined by a real one percent, while the external debt in foreign currency, expressed in local-currency terms, rose by 4 percent in real terms. The rise in the external debt was due to the weakening of the NIS against the dollar in the course of the first half of the year, whereas the foreign-currency value of the external debt fell by about 2 percent in that period.
  In the first half of 2005 the total debt/GDP ratio went down to 102 percent, continuing along the downward path of 2004. This was a reversal of the upward trend of the last few years when it rose from 88 percent in 2000 to 104 percent in 2003. The composition of the debt changed, however: the share of the external debt in GDP rose, as a result of the strengthening of the dollar against the NIS, while the share of domestic debt in GDP went down, continuing the trend that started in 2004, against the background of the government's reduced requirement for domestic borrowing that resulted from the contraction of the government deficit following large-scale privatization and the high rate of growth.
  Despite the reduction in the government's total debt/GDP ratio, a ratio of 102 percent is higher than the OECD average of 76 percent, and that in the EU of 79 percent. Furthermore, one of the main conditions specified in the European Stability and Growth Pact (the Maastricht Treaty) is a debt/GDP ratio up to 60 percent or a clear downward path converging to that figure. It is important that the government continue with the long-term process of reducing the budget deficit, in order to lower the share of the debt burden in GDP to the universally accepted levels. This will contribute to the continued reduction of yields to various terms, to the development of the private bond market, and to the improvement of the credit rating of Israel's economy, and thereby also to a lower cost of financing for the government and the business sector. It should be borne in mind that the debt/GDP ratio is one of the basic indicators of an economy's stability as perceived by domestic and foreign investors, and the lower that ratio, the more stable they consider the economy to be.
  At the end of the first half of 2005 the unindexed fixed-interest part of the debt constituted only 15 percent of the total government debt, despite the rise in this component's share of total borrowing in this period. The relatively low share of unindexed fixed-interest debt is the outcome of government policy in the past, mainly the large government issues of CPI-indexed nontradable bonds prior to the pensions reform, and the large issues of bonds abroad in 2003 and 2004. It is thus important for the government to continue raising the funds it requires to cover its deficit mainly via unindexed bonds, particularly in the light of the large size of the total debt.
  The share of tradable debt in the internal debt continued to rise in the first half of 2005 and reached about 62 percent at the end of the half year, compared with only 51 percent in 1998. This occurred––and is likely to continue––due to the pensions reform which put an end to the issue of nontradable bonds to the pension funds which then turned to the tradable-bonds market.
  Interest payments on the government debt in the first half of 2005, using the definitions accepted world wide, were 6.7 percent of GDP, a high figure by comparison with the 2004 averages of 1.9 percent in the OECD and 2.9 percent in the EU. This is mainly due to the higher level of government debt in Israel than in other advanced economies. Continued adherence to the reduction of government deficit will also lower the government's debt and the current cost of servicing it. This will increase the government's flexibility in setting budget priorities.
  The government should implement its program of debt management in the near future, to ensure that it is consistent with the integration of the domestic capital market with the global capital markets: it should increase the share of unindexed debt and its term to maturity; issue CPI-indexed debt only for long terms, and stop issuing floating-interest debt. It is worth stressing that unindexed fixed-interest debt is the most widely traded debt in the international markets, as most countries with low inflation, like Israel, issue the bulk of their domestic debt unindexed, and at fixed interest.
 
Table 1: Gross Government Debt and Government Borrowing.
  2000 2001 2002 2003 2004 June 2005
A. Balance of debt at end-period (NIS billion, current prices)            
1. Internal debt 305 326 372 390 403 401
2. External debt 110 120 131 132 136 142
3. Total debt 416 446 503 521 540 543
B. Share of government debt in GDP (percent)1            
1. Internal debt 65 68 75 78 77 75
2. External debt 23 25 26 26 26 27
3. Total debt 88 93 102 104 103 102
C. Composition of debt by indexation            
1. CPI-indexed 58 54 53 51 49 48
of which NonTradable 34 33 32 31 29 28
2. Unindexed (fixed interest) 7 9 10 13 14 15
3. Dollar-indexed 4 4 3 1 0 0
4. In foreign currency 27 27 26 25 25 26
5. At floating interest 5 7 8 9 11 11
6. Total 100 100 100 100 100 100
D. Share of interest payments on government debt in GDP (percent)1            
1. Internal debt 3.8 3.7 3.6 4.4 6.0 5.0
2. External debt 1.2 1.3 1.2 1.2 1.2 1.3
3. Total debt 5 5 4.8 5.6 7.2 6.3
4. Total debt according to Maastricht2 5.1 5.8 7.8 4.9 5.8 6.7
E. Composition of government borrowing by type of debt (percent, during period)            
1. Domestic 86 89 87 73 72 88
a. Tradable 57 67 69 57 65 86
of which CPI-indexed 6 13 27 22 20 28
Unindexed (fixed interest) 29 33 26 24 28 47
Dollar-indexed 1 0 0 0 0 0
At floating interest 21 21 16 11 16 11
b. Nontradable (all CPI-indexed) 29 22 19 17 7 2
2. Abroad 14 11 13 27 28 12
3. Total 100 100 100 100 100 100
F. Composition of government borrowing by indexation (percent, during period)            
1. CPI-indexed (including nontradable) 35 35 46 39 27 31
2. Unindexed (fixed interest) 29 33 26 24 28 47
3. Dollar-indexed and in foreign currency 15 11 13 27 28 12
4. At floating interest 21 21 16 11 16 11
5. Total 100 100 100 100 100 100
G. Composition of domestic tradable borrowing (percent, during period)            
1. CPI-indexed 11 19 39 39 31 33
2. Unindexed (fixed interest) 51 49 37 42 44 54
3. Dollar-indexed 1 0 0 0 0 0
4. At floating interest 37 31 24 19 25 12
Total 100 100 100 100 100 100
 
1Balance of debt at end of period divided by GDP during period (the method used in the eurozone).
2Nominal interest plus indexation differentials.
 
Table 2: Interest Payments on Israel's Government Debt, According to the Univesally Accepted Definition1
  Interest payments on Interest payments on Interest payments on total debt in budget
Total debt Internal debt External debt Total debt Internal debt External debt
NIS billion, at current prices Percent of GDP Percent
2000 24.1 18.3 5.7 5.1 3.9 1.2 13.8
2001 27.6 21.5 6.1 5.8 4.5 1.3 14.7
2002 38.6 32.8 5.7 7.8 6.6 1.2 19.5
2003 24.6 18.4 6.2 4.9 3.7 1.2 12.4
2004 30.5 24.4 6.1 5.8 4.7 1.2 15.3
June 2005 17.7 14.2 3.4 6.7 5.4 1.3  
 
Table 3: Interest Payments on Israel's Government Debt, According to the Definition Used in Israel1
  Interest payments on Interest payments on Interest payments on total debt in budget
Total debt Internal debt External debt Total debt Internal debt External debt
NIS billion, at current prices Percent of GDP Percent
2000 23.5 17.7 5.7 5.0 3.8 1.2 13.4
2001 23.9 17.8 6.1 5.0 3.7 1.3 12.7
2002 23.6 17.9 5.7 4.8 3.6 1.2 11.9
2003 28.1 22.0 6.2 5.6 4.4 1.2 14.1
2004 27.9 21.8 6.1 5.3 4.2 1.2 14.0
June 2005 16.7 13.3 3.4 6.3 5.0 1.3  
 
1 Data on interest payments on Israel's government internal debt issued before 2001 are not calculated according to the international definitions, i.e., indexation differentials on the indexed debt and the rate of actual inflation in the case of the unindexed debt are deducted, and these are recorded as part of the balance of the principal and not as a budget expenditure, the universally accepted method. For debt issued after 2001 these are calculated as nominal payments, in line with the internationally accepted rules, and are recorded as a budget expenditure, as in other countries. As a result, these data on interest payments, according to the definition used in Israel, are generally biased downwards relative to the method used abroad.
 
Table 4: Average Term to Maturity on the Government Debt (Years)
  2000 2001 2002 2003 2004 June 2005
Total debt 6.5 6.6 6.6 6.9 6.8 6.8
Total internal debt 6.2 6.5 6.6 6.6 6.2 6.2
Tradable 4.5 5.1 5.4 5.5 5.3 5.6
Unindexed 4.4 5.6 5.6 4.7 4.1 4.1
At fixed interest 2.5 4.0 4.1 3.9 3.6 3.9
At floating interest 7.0 7.6 7.5 5.9 4.7 4.4
CPI-indexed 4.9 5.3 5.8 6.5 6.8 7.5
At fixed interest 5.3 5.8 6.0 6.6 6.8 7.5
At floating interest 1.7 1.1 0.7 0.1    
Dollar-indexed 2.5 1.8 1.0 .6 5.1 4.6
Nontradable 8.6 8.5 8.3 8.2 7.7 7.4
External debt 7.1 6.8 6.5 8.0 8.6 8.4