‘The crisis isn’t over yet’

Bank Hapoalim’s Zion Kenan urges caution despite upbeat signs

Gateway to Israel logo370 (photo credit: Courtesy)
Gateway to Israel logo370
(photo credit: Courtesy)
The International Monetary Fund gathered for its annual conference in Washington, DC, last week to discuss the major trends in the world economy. Bank Hapoalim president and CEO Zion Kenan sat down with The Jerusalem Post in Washington to talk about the meetings, the global outlook and what it all means for Israel.How would you summarize your main impressions from the IMF meetings this year?
It was really hard to find sources of optimism this year.
No doubt, the current fiscal crisis in the United States, and the potential threat of a US default, has been like a very dark cloud affecting the mood in the meetings.
In addition, the fact that the IMF lowered its growth forecasts for the global economy has also been a source of concern.Has there been any noticeable change in the approach toward emerging-market economies?
As I am sure many readers are aware, this has not been a very good year for emerging markets, and in particular for Brazil, Russia, India and China, the BRIC countries. Their growth rates have been reduced, they have suffered from capital outflows, and their currencies have typically depreciated vis-à-vis the US dollar. As a matter of fact, weaker growth prospects for 2014 are the main reason behind the IMF downward revision of global growth for 2014. Having said that, I still believe in the great potential of emergingmarket economies from a longer-term perspective of, say, the next decade.Is the euro zone on safe grounds now that positive growth rates are back in the forecasts for next year?
Of course it is good news to see that after two years of negative growth the euro zone is back to positive territory. Yet it is hard to be enthusiastic about the quite pale growth rates as in the forecast. The thing to emphasize here is that unemployment in that part of the world remains high, at 12 percent, and it is quite hard at this point in time to depict a return to full employment.Has the global crisis that began in 2007-08 reached an end?
I don’t believe so. True, the risks of an extreme scenario like a Lehman Brothers collapse are now much lower. Yet the world has not returned to full employment, and it will take considerable time before we see that happening. One area that is the source of frustration for many economists and business people is the very slow pace of reform, especially in the euro zone. Consequently, one cannot rule out the possibility that sooner or later we might see new crises ahead.What is your view of international banking trends these days?
The banking sector is still suffering from the implications of the 2007-08 crisis. Some banks have been capitalized and have cleaned their balance sheets. Yet others are still lacking capital and will need to eliminate toxic assets that are still held in their portfolios.
Things are especially difficult in the periphery countries in the euro zone, including Spain and Italy. Banks there remain vulnerable to further shocks, and there may be a need for further bailouts with budgetary consequences for the governments at stake.
I believe the banking sector in the US is in much better shape than those in Europe.
Overall, we will see lower returns on capital and a strong pressure to cut expenses and increase efficiency and productivity.
Are the leading central banks doing their job properly these days?
Well, it is clear that without the major monetary expansion seen in the US and Europe following the start of the global crisis we would not have seen a rapid recovery to positive growth-rates territory in most countries by mid-2009. Central bankers have signaled to market participants that they will do anything needed to ensure financial stability and to avoid major bank collapses.
Yet I believe that the very low policy rates are a source of concern.
Negative real interest rates cannot become a permanent phenomenon. But in the meantime it is difficult to see how exactly will it happen that there will be a normalization of interest rates. Many of my conversations with foreign bankers dealt on this issue; namely, the risks associated with the massive monetary expansion of the recent years.How does the Israeli economy fit into the global picture as seen from the IMF meetings?
In a comparative sense, Israel looks attractive for investors.
Specifically, the fact that there has been a fiscal adjustment and the 2013-14 approved government budget has included tax hikes and other adjustments to ensure that publicsector debt relative to GDP returns to a declining trend is a positive fundamental, supporting the outlook for our economy.
In addition, we are back to being a surplus country in our current account of the balance of payments, and we have seen an additional decline in the rate of unemployment. All of these led S&P to confirm our credit rating of A-plus.
What about geopolitical risks?
If anything, we have seen lately a reduction in these risks, especially due to a calmer outlook in the Syria and Iran front.
Some of the rebound in our Tel Aviv stock market has been related to this phenomenon.What specific areas of Israel’s economy have been at the center of attention for foreign bankers and investors?
We are seeing growing interest in our infrastructures and energy sectors, especially on the domestic production of natural gas. At the same time, various foreign observers have emphasized the hi-tech and banking sectors as having interesting potential for the near future.Which sectors would you characterize as weak in Israel’s economy now?
No doubt, the exports sector is suffering from weaker global conditions and a strong domestic currency. The worry here is that some exporters might become no longer competitive vis-à-vis their foreign counterparts.
My view is that our Finance and Industry ministries should prepare some emergency plans for aid to various export companies in case that this would be needed.What has been your message to foreign investors considering investments in Israel?
I have stressed again and again the great potential of the Israeli economy in the years to come. Luckily, we are not suffering from any major macro imbalances as in many of the leading Western countries. Our policy fundamentals are looking good, and with the right policies we may reach growth rates above 4% next year. For this to happen, the government would have to stress further pro-growth and pro-business policies. But it seems that we are not there yet.This article was produced in conjunction with Bank Hapoalim.