Q3 inflation claims more victims

October 25, 2007 07:23

Israel's consumer prices rose the most since 2002, jumping 2.5% during June, July and August.

1 minute read.

The number of Israeli companies affected by higher third-quarter inflation grew on Wednesday as Discount Investment Corp. and Bezeq said financial costs were "significantly higher"due to rising costs, while Phoenix Holdings warned of a quarterly loss and Ma'alot, the Israel Securities Rating Company, said Avis and New-Kopel also would post losses. "These leasing companies have their liabilities tied to the Consumer Price Index and when it spikes, their financial expenses also spike," Yuval Torbati, the director of corporate ratings at Ma'alot, told The Jerusalem Post. "For the third quarter, they will record a net loss because of the huge spike in their financial expenses." Over the last few weeks, some of the country's largest companies, including Africa Israel Investments Ltd., Migdal Insurance Holdings Ltd., Housing & Construction Holding Co. Ltd. and Strauss Group Ltd. have warned that they expect to post substantial increases in financing expenses over the third quarter, with costs estimated to rise by tens of millions of shekels. On Tuesday, they were joined by Bezeq and Discount, which also said the value of its"assets linked to the dollar exchange rate" was lower, following the dollar's decline this year. Phoenix, an insurer, said it would report a loss for the quarter after inflation accelerated, returns on its investments fell and the dollar weakened. Israel's consumer prices rose the most since 2002, jumping 2.5 percent during June, July and August, the three-month period upon which Israeli accounting laws require companies to base third-quarter earnings. Price growth has since slowed, with a recent Bank of Israel economist poll showing anticipated inflation of 1.5% in the next 12 months. Comparatively, second-quarter inflation rose only 0.7% and third-quarter inflation last year rose 0.2%. The CPI is an index number measuring the average price of consumer goods and services purchased by households and the percent change in the CPI is a measure of inflation. While leasing companies are particularly vulnerable to significant spikes in inflation as their financing is all index-linked, Ma'alot's Torbati was not concerned about the financial stability of Avis and New-Kopel. "The third quarter rise in the CPI won't have any cash flow significance on these companies and I expect that over an extended period of time the losses will be recovered in index-linked leasing contracts," he said. "However, if unlike predictions inflation continues to rise in the fourth quarter and into 2008, then this will begin to hurt profitability." Bloomberg contributed to this report.

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