Despite uncertainties, optimism still reigns at Bank Hapoalim

An interview with Prof. Leonardo Leiderman, chief economic adviser at the country's largest bank.

bank hapoalim 88 (photo credit: )
bank hapoalim 88
(photo credit: )
Prof. Leonardo Leiderman, an Argentinean native who made aliya nearly 30 years ago, has had a prestigious career in academia and the business world. A professor at Tel Aviv University's School of Business, Leiderman has been called on to advise various nations in Latin America, Europe and elsewhere in times of fiscal crisis. He spoke to The Jerusalem Post earlier this month about how he views Israel's position in the current global crisis. How would you summarize the impact that the current global economic crisis has had thus far on Israel's economy? Being a small, open economy, there can be no doubt that the global crisis is having an impact. Yet, what is remarkable is that Israel is among the least affected economies by the crisis. For example, the weakening of our currency, the shekel, vis-a-vis the US dollar has been quite moderate compared to the depreciation seen in the Euro and other leading currencies against the dollar. The same applies to stock market price indices. Our TA100 index has fallen along with the decline in the S&P 500 and other US indices, but the percentage decline has been smaller than in European bourses or those of emerging market economies. What about the impact on real economic activity? Any signs of recession in Israel? After a serious recession in 2001-2003, in light of a global tech crisis and intifada in our area, Israel's growth performance has been quite remarkable over the period 2004-2008. Annual growth rates averaged about 5 percent, which is impressive. Lately, we have started to witness some decline in the growth of our exports (due to the global slowdown) but domestic consumption and investment have also shown a slowdown. In summary, at Bank Hapoalim we now expect Israel to grow at about 2% in 2009, while at the same time growth in most advanced countries is expected to be in negative territory. What would be the main reasons for Israel's being more moderately affected by the global crisis than other countries? I believe there are two main reasons for that. First, when the global crisis erupted, Israel had no "bubbles" in the housing or credit markets like in the US, and the exposure to US subprime loans had been quite minimal. Hence, we are less vulnerable to these two most sensitive areas of the crisis. Second, we had a mix of very sound monetary and fiscal policies over the last years which contributed to a very solid external position (with current account surpluses) as well as a gradual improvement in our fiscal stance, as shown, e.g., by a gradually declining ratio of public sector debt to GDP. For both these sets of reasons, Israel had quite favourable "initial conditions" to deal with the crisis. Shouldn't the political uncertainties related to the upcoming general elections, to be held in February 2009, complicate things for the economy? In principle I would agree with that, since elections mean additional uncertainty during a highly sensitive period. Yet in practice, we have seen again and again in recent years that local political uncertainty has had little impact on our markets and our economy. It seems as if the phenomenon of a "political business cycle" is gone, and market participants mostly expect continuity of the current sound macro policies rather than a major change of policy regime. Beyond the current global crisis, what would be some reasons for concern about the future of Israel's economy? I believe that we need a major improvement and reform in all areas of our education system, from primary school to university education. Our key comparative advantage is our skilled human capital, which shows up primarily in the high-tech industry. Having a solid and deep educational system is a prerequisite for preserving this advantage. Yet the performance of our students in international exams has been weakening over the years. At the same time, we have seen some kind of ageing process in our universities which have now a tougher time recruiting Israeli graduates from US and European schools to come back and teach in our country. What about geo-politics and in particular the security situation vis-a-vis the Palestinians? Well, no doubt that previous intifada episodes have been quite negative for our economy. However, even if relations with our neighbors are not fully peaceful, we have had reasonably good periods of economic growth. Clearly, any breakthroughs in the peace process could be very good for our economy, yet Israel has shown that it can continue growing even in periods of relative turbulence in the relations with the Palestinians. In summary, are you bullish or bearish regarding the Israeli economy in the last two years of this decade? There is reason to be proud of Israel's achievements. Yet, as indicated, there are channels of vulnerability, especially if and when the current global crisis keeps moving forward. Consequently, we expect the economy to slow down its growth process in the 2-3 years ahead. But for the period thereafter we do expect a gradual return to more satisfactory levels of growth.