BoI expects stable foreign investment

Upgrade from emerging market to developed market shouldn't depress capital inflows, study says

Stanley Fisher 224-88 (photo credit: Ariel Jerozolimski)
Stanley Fisher 224-88
(photo credit: Ariel Jerozolimski)
Israel's admission to the Organization of Economic Cooperation and Development and its possible reclassification from emerging market to developed market is not expected to have a negative impact on foreign investment, the Bank of Israel said Monday. "Israel's accession to the OECD and to the list of developed economies would certainly improve its international standing, lower its cost of borrowing and oblige it to meet the accepted international standards on all matters related to economic policy," the Bank of Israel's Shelly Reiss and Nimrod Mevorach said in a report. Their study examined the effects on capital inflows of Israel's expected accession to the OECD. "In this sense, the commitment itself is likely to lead to a further improvement in Israel's economic fundamentals and to make it more attractive to foreign investors," the report said. The study also analyzed the process of Israel becoming reclassified as a developed market according to the global share indices on the size of capital inflows into the economy. Reiss and Mevorach found that it did not result in a significant change in capital inflows to the countries that joined the OECD relative to those that did not. The study also showed that there was a direct correlation between joining the organization and an improved credit rating. Today, the local economy accounts for about 2.5 percent to 5% of the Morgan Stanley Capital International (MSCI) Emerging Markets Index, and its weight in the global investment pie would fall to about 0.2% if Israel is admitted to the developed-markets index. "If Israel is reclassified, its share in the global investment pie would fall to 0.2%, out of which Teva Pharmaceuticals Industries Ltd. accounts for 0.1%," Merrill Lynch analysts recently warned. "Therefore, the moment Israel is defined as a developed rather than an emerging market, not one foreign investor will be interested in investing time and resources here, and this will herald the end of the era of foreign investment in Israel and the start of capital outflows." Israel has been put on the MSCI watch-list for reclassification together with South Korea and Taiwan. A decision is expected next year, after which Israel would get an adjustment period, so the potential change would not come into force before June 2010. "The four countries that joined the MSCI list of developed markets in the last 20 years benefited from continued foreign financial investment in shares," Reiss and Mevorach said in their report. "No evidence was found to support the claim that the decline to a share of less than 1% of the market portfolio (in the index of the developed markets) resulted in a significant drop in the volume of investments, and certainly no negative impact on investments was discerned over time." In the short-term, there could be a certain decline in the inflow of investments in the economy, they added. Finance Minister Ronnie Bar-On has expressed confidence that Israel will be able to complete the ascension process by the end of 2009. At the beginning of August, he announced that Israel had successfully completed the first stage of the accession procedure for becoming a full member of the OECD.