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
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.
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.
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+.
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
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
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.
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.
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.
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.
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
post-Social Protest era?
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.
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
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
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%.
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.
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.
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.
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.”
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.
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.”
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.