Gateway to Israel:

By
September 1, 2013 17:05

A sweet new year: Certainty is just around the corner




Gateway to Israel

Gateway to Israel. (photo credit: Courtesy)

Since last year’s apples were dipped into honey, the world of Israeli economic policy has been in a state of upheaval. Following a dramatic and stormy year, this Rosh Hashana brings with it the promise of greater economic political stability

As families around the country ate honey cake and pomegranates for the start of the Jewish new year last September, a crisis over the state budget was already brewing, one that would fell the government and lead to new elections within less than a month.

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Instead of hitting the 2 percent of GDP deficit target, the government’s overspending hovered at around 3%, necessitating tax increases and budget cuts. By January, the final deficit figures grew to 4.2%, the result of overly-optimistic revenue estimates made two years earlier, when the two-year budget for 2011-2012 passed. In the election battle, Labor leader Shelly Yacimovich called the deficit “monstrous,” and up-and-comer Yair Lapid demanded that the government stop using the middle class as an “ATM” to fill its budgetary needs.

Following elections, the new government’s first order of business was to attend to the budget; failure to pass one would trigger yet another round of elections. Yet by the time Lapid (a self-proclaimed economic novice) was appointed Finance Minister, drafted the budget proposal, put it to a vote in the cabinet, pushed it through the finance committee and finally passed in the Knesset, it was nearly August. In the middle of it all, S&P downgraded Israel’s credit rating from AA- to A+.

In its final form, the budget declared 2013 a lost cause, setting the deficit target to 4.65%, but put a plan in place to bring it down to 3% the following year. To do so, Lapid had to pass several unpopular measures: raising Value Added Tax, increasing income taxes for the second year in a row, pushing forward higher corporate taxes, and scaling back a slew of welfare benefits. Notably, benefits aimed at Ultra-Orthodox families were slashed and redefined as part of an effort to push one of the poorest segments of the population into the labor force.

As if the uncertainty surrounding the budget were not enough, just days after the election, well-respected Bank of Israel Governor Stanley Fischer announced he would be stepping down in June. Although reforms Fischer initiated to professionalize the Bank, such as installing a 6-person committee to make interest rate decisions, would lead to a smoother transition, Prime Minister Binyamin Netanyahu and Lapid failed to nominate anyone during Fischer’s final five months.

Eventually, the two chose Jacob Frenkel, who had run the Bank from 1991-2000, during which he helped tame Israel’s overly-robust inflation. While Fischer had utilized a number of policy tools to try and attack the various issues affecting Israel’s economy--keeping inflation moderate, reducing inequality, keep the housing market in check, and moderating the shekel’s strengthening--Frenkel was seen as more of an inflation hawk. Analysts wondered if he would have the adaptability to deal with the wider set of issues facing Israel, and whether he was willing to intervene in markets the same way Fischer was.

It turned out to be a moot question; a scandal over alleged shoplifting in a Hong Kong airport, which Frenkel vehemently denied, led him to withdraw his candidacy a month after his nomination. Perhaps fearing similar public scrutiny, the second nominee, Bank HaPoalim chief economist Leo Leiderman, withdrew his nomination after just two days.

Amid the brouhaha, an upheaval was also underway at the Tel Aviv Stock Exchange. Both the director and the chairman announced their resignations amid clashes with the Israel Securities Authority. Replacements have yet to be named.

Yet after all the tumult, a period of remarkable uncertainty in Israeli fiscal and monetary policy is drawing to a close, paving the way for smoother sailing in the new year. The budget for the rest of 2013 and all of 2014 is fully laid out, and a new BOI governor is expected to taking the helm of Israel’s monetary policy by the time the “chagim” are over.

The questions going forward will instead focus on how successfully the government will implement market reforms--such as building new ports, breaking up big conglomerates, and tackling the inflated price of housing--and whether it will stumble on policies governing Israel’s newfound natural gas and other resources.

The post-Social Protest era?


In the past year, the start-up nation continued doing what it does best, with several major exits. Google, IBM, and Berkshire Hathaway all made major investments in Israeli companies (Waze, Trusteer, and Iscar, respectively), while the introduction of natural gas was expected to add a full percentage point to the country’s GDP growth.

A combination of continued global economic flailing and internal regulatory conflict, however, hampered Israel’s markets, which limped along. Trading volume dropped to its lowest level in eight years, less than a quarter of its 2010 levels.

“It’s not a recession. We’re still growing, but far less,” says Bank HaPoalim’s head of equity research.Yaron Fridman. “Unquestionably, it’ll revitalize. The question is when.”

Interestingly, it was not the biggest companies pushing the growth. Breaking down the 8.86% growth in the TA-100, the index of the top 100 companies, the index that excludes the top 25 companies grew 26.19%. The TA Midcap-50, which includes the first 50 companies smaller than those on the TA-100, soared by 46.51%.

Many of the big companies that had tough times were influenced by outside events: Drug manufacturer Teva lost a patent dispute on its drug copaxone in the United States, while the Israel Chemical Corporation suffered losses when a tiff between major foreign potash dealers sent the price of the chemical plummeting.

Companies adjusting from the changes brought about from 2011’s social protests, which coincided with an increase in Israeli consumer’s sensitivity to price, surged back to life this year. For example, popular reforms to the telecommunications companies, which sent the prices of mobile phone subscriptions plummeting, led companies to lose up to half their value amid new competition.

“This year was the recovery from the social protests. These companies, at the end of the day, still have value. At a certain point the market understood that,” says Fridman . Because the big telecommunication companies still provide the infrastructure, they continued to get income. Chains like Shufersal, a supermarket, also figured out that lowering their prices could keep their customers coming back. Real estate, services and the financial sector also posted healthy gains.

With uncertainty affecting specific companies and sectors but an overall positive trend, says Fridman, investors should look for a diverse portfolio. “Instead of stock picking, this is the time for indexes,” he says. “There is a feeling that we’ll see a big improvement because we’re coming from a weak place.”

The opposite is true of the bond market, says Ilan Buchbut, who heads Bank Hapoalim’s Fixed Income desk. “We’ve seen an increase investors’ appetite for risk, with a trend of money moving to riskier bonds,” he says.

“Unlike the diversified equity portfolio, many bond-holders are not taking enough risk into account, so you should really be picking specific bonds. The indexes are solid, but it’s better to pick them.”

Looking to the future, after a year in which recession continued to plague Europe and political dysfunction somewhat hobbled the United States recovery, global economic trends are at last taking an upward turn. For Israel’s economy, that is sweet news for a new year.


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