(photo credit: Courtesy of Albatross)
Israel must establish a sovereign-wealth investment fund from future offshore
natural- gas revenues to protect against catastrophic risks like war, economic
crisis or natural disaster, a report published this week by the Milken Institute
A secondary goal of such a fund would be to build up revenues
to cover pension obligations, health care or other assets affecting Israel’s
human capital, it said.
Recent discoveries of underwater gas fields – led
by the Leviathan and Tamar fields, which between them contain an estimated 700
billion cubic meters of natural gas – are expected to turn Israel into a
natural-gas exporter in the coming years.
Milken’s report was based on a
workshop the economic think tank supervised in Los Angeles earlier this year.
Participants in the workshop, or Financial Innovations Lab, included Bank of
Israel Deputy Governor Karnit Flug, National Economic Council head Eugene
Kandel, Finance Ministry Director-General Haim Shani and other senior Israeli
The workshop participants recommended that Israel use the New
Zealand Natural Disaster Fund as its model. That fund is governed by the
Earthquake Commission – a “Crown entity” controlled by the New Zealand
government, but which operates as a private corporation. It currently holds
about NZ$5.6 billion ($4.3b.) and was instrumental in enabling a quick recovery
from the 6.3-magnitude earthquake that struck Christchurch, New Zealand’s
second-largest city, in February.
The Israeli government is not
financially prepared for a catastrophic quake and remains exposed to this and
other risks from weather, fires, war and economic downturns that could endanger
the country’s national security, the report said.
New Zealand also sets a
good example example on how to use a sovereign-wealth fund to meet future
social-security shortfalls, according to the report. It said Israel, which still
has a $120b. budgetary pension obligation, should designate a fund based on the
New Zealand Superannuation Fund and Norway’s Government Pension
Like the earthquake fund, the New Zealand Superannuation
Fund is financed by capital contributions from the government and governed by a
separate Crown entity. The government plans to allocate about $2b. a year to the
fund over the next 20 years. The Norwegian pension fund is completely funded by
Norway’s petroleum sector through royalties, company taxes and excess-profit
tax. Investment returns are transferred back to the government’s fiscal budget
to fulfill pension liabilities, the report said.
participants also noted that Israel could use a sovereign fund to enhance its
foreign credit rating to AA (two rungs below AAA) because international markets
interpret foreignexchange accumulation as a sign of good governance and
sustainable fiscal position, the report said.
“The existence of a
sovereign-wealth fund suggests that there are government guarantees on domestic
financial-sector deposits, and the financial system as a whole becomes more
credible as the fund’s assets grow,” the report said. “This higher
sovereign-risk rating would reduce sovereign, corporate and private project
borrowing while simultaneously strengthening the country’s emerging role as a
bilateral creditor in expanding international trade.”
The report said
using a sovereign fund to invest in global markets would help Israel avoid
“Dutch Disease” – a term coined by The Economist
to describe the negative
impacts on an economy of large inflows of foreign capital. The name refers to
the damage done to Dutch manufacturing and exporting industries after rapid
increases in oil and gas revenues in the late 1950s and early 1960s caused the
real exchange rate to appreciate.
Prime Minister Binyamin Netanyahu and
Bank of Israel Governor Stanley Fischer both support establishing a
sovereign-wealth fund. Like the Milken report, Fischer recommended last December
that Israel invest its income abroad, to moderate the short-term effect of gas
revenues on the exchange rate.