Insights from Israeli Central Bank [guest post]

By Robyn Klingler Vidra

Last week I attended a Bloomberg event in London on “The Israeli Economy”. The keynote was given by Zvi Eckstein, the Deputy Governor of the Bank of Israel, on “Israel present and future”. Zvi is impressive. The mainly British audience felt like they were in a classroom at Tel Aviv University, and that the Bank of Israel was in good hands (thinking that Zvi and Stanley Fischer together formed an Israeli central banking dream team). The talk covered: (1) Israeli macro-economic indicators, (2) Monetary Policy and (3) Israeli industry.

My notes from each section of the talk are detailed below. First, here are some of the key takeaways:

  1. Israel’s high-dependence on high-tech industry. High-tech accounts for 31% of industrial output, and exports accounting for 43% of GDP. We all knew that high-tech was mission-critical for the Israeli economy, but did you know it was that pivotal? High-tech only accounts for 15% of the US industrial output, as a point of comparison.
  2. The Bank of Israel will increase interest rates (not in the very near term, there was no commitment on that) in the medium and long term, to head off a credit bubble. Look out first time home buyers, your mortgages will only get more expensive in the coming years as the central bank tries to control a bubble.
  3. Government expenditure, debt and deficit keep going down, which would be great if Israel were vying for membership in an exclusive low-debt club (aka what the debt-laden Western European countries demand of  European Union wooers from Eastern Europe), but may not be that attractive in light of point 1 – Israel needs to dedicate all available (and even those borrowed!) resources towards maintaining its competitive edge. This is the wrong time to bring down debt and government expenditure. It is the right time to support innovation, new industries, and the incubator programmes that have seen their funding cut.
  4. More Israelis need to work. The employment rate in Israel, not the unemployment rate, needs to go up. So, more people need to start looking for work to help Israel shed its highest-poverty-rate-in-the-OECD title. Let Mexico have that the poverty title back, its not something the new OECD kid on the block needs to brag about.

Here are the notes from the three parts of Professor Eckstein’s 13 January talk at Bloomberg in London:

Israeli macro-economic indicators

  • Israel did not have any negative growth rates throughout the crisis, in fact, Israel maintained GDP growth of approximately 4% since 2008 and unemployment (the percent of people who actually want to work who can’t find jobs) is about 3%
  • Israel’s GDP growth during the crisis was better than the developed world, but worse than the emerging markets. Interesting that in the aftermath of the crisis Israel moved from an emerging market to a developed economy, by way of MSCI World Index and OECD inclusion, in May 2010.
  • Israel’s economic strength in terms of financial markets has been driven by:
    • No significant private or public debt growth
    • No strong interbank lending in Israel, the Bank of Israel is now working to develop this marketplace
    • A high savings rate
    • High capital adequacy level, 11%, so Israel’s banks had comparatively more capital reserves to their loan books than US banks
    • Israel’s public expenditure as a percent of GDP around 40 to 50%, military spend accounts for 9% of that
    • Debt to GDP is going down, now around 70% and going to reach 60% by 2020
    • Deficit as a % of GDP 3% in 2011, expected to be 2% in 2012 and down again to 1% in 2013
    • So, Israel policymakers are working to lower public expenditure, debt and deficit
    • 43% of GDP from exports (fair enough given the size of Israel’s domestic market)
    • Current Account has been positive since 2005. Israel exports more than it imports
    • Gas was discovered in Israel. The Tamar gas field 50 miles west of Haifa, which is worth 30 years energy supply. This gas was found in 2009 and exploration expected to begin 2012, though there are disputes with Lebanon.

Monetary Policy

  • Last year a law was passed that targets inflation, so a price stability target of 1 to 3%in place
  • Israel was the first developed market to raise interest rates following the crisis, in September 2009, and had lowered interest rates in advance of the crisis
  • Inflation is currently about 2.6%, and the Bank of Israel expects it to rise just above 3% in the short term, but then back to approximately 2% in the long term
  • The Bank of Israel bought Shekels in currency markets during the crisis to strengthen the Shekel. Bought USD 25mm daily beginning in March 2008, then up to USD 100mm worth of Shekels each day by the end of 2009. Now the BoI purchases Shekels in FX markets in line with market fluctuations to help keep the Shekel at the price they think is right (this “right price” is of course not publicly disclosed by the Bank of Israel, but we as an indication the IMF have said that the Shekel is thought to be overvalued against the Dollar by about 6%.
  • The Bank of Israel will “raise interest rates to prevent a credit driven bubble”. Read: mortgages will not get cheaper, interest-wise, but the government is doing their best to ward off a real estate bubble.

Israeli Industry

  • High share of High-tech in terms of industrial output, 31% of industrial output comes from high-tech industry
  • EU average of high-tech to total industrial output is 10% high-tech, US is 15%, and Canada only 6% high-tech, so comparatively Israel is significantly over-reliant on the high-tech sector
  • Israel has a low employment rate. Not unemployment rate as the unemployment rate is those looking for work who can’t find it. Employment rate is the % of the population who is either employed, or looking to be employed. There is greater capacity for Israel to produce if the employment rate increased. The ultra-orthodox and Arab communities joining the labour force would be a big boost here.
  • High-poverty rate, the highest poverty rate in the OECD (worse than Mexico)
  • Sliding negative quality of education in Israel, which is what Zvi credits Israel’s high-tech competitiveness to, saying that its been Israel’s great education establishments that have helped to drive its competitiveness. Sited the Technion as an example. Education needs investment if Israel is to maintain its edge.

***
Robyn Klingler-Vidra is an International Political Economy (“IPE”) MPhil/PhD candidate at the London School of Economics (“LSE”). Her thesis focuses on public efforts aimed at creating VC industries in Israel, Finland and Singapore. She has spent six years in the institutional investment industry, most recently for a funds of hedge funds manager. Robyn’s public sector experience includes internships in the UK Parliament and the US State Department Foreign Service in Spain. She is a research coordinator for the World Economic Forum Executive Opinion Survey for the UK. Robyn received her BA in Political Science from the University of Michigan and MSc in IPE from the LSE.

Robyn Klingler Vidra
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Robyn Klingler Vidra

Lecturer in International Political Economy at King's College London
Robyn Klingler-Vidra is a Lecturer at King's College London in the Department of European & International Studies, a Senior Research Fellow at the Coller Institute of Venture at Tel Aviv University and the Research Manager for the World Economic Forum Global Competitiveness Ranking Executive Opinion Survey for the United Kingdom.

Robyn’s research focuses on government efforts to build venture capital markets as a means to promote innovation, economic growth and entrepreneurial clusters. She leads the World Economic Forum’s UK Executive Opinion Survey on global competitiveness and is an instructor for LSE Enterprise executive education courses on capital markets, economic competitiveness and innovation. Her publications include peer reviewed journal articles on the development of venture capital markets in East Asia and how policy models transform as they diffuse. She has also published a number of policy papers on economic growth and a working paper on the social impact of business.

Before returning to academia, Robyn spent eight years in the financial sector, working as a financial institutions' liability underwriter, a research manager at an expert network firm and an investor relations manager at a fund of hedge fund. Her public sector experience includes internships with the Economic Section of the US State Department Foreign Service and in the Westminster office of a UK Member of Parliament.

She received her BA from the University of Michigan, was a visiting scholar at the National University of Singapore Lee Kuan Yew School of Public Policy and completed her MSc and PhD in International Political Economy in the International Relations Department at the London School of Economics & Political Science. Robyn was the first-ever winner of the BISA Award for Teaching Excellence by a Postgraduate Student and holds the Postgraduate Certificate in Higher Education (PGCertHE).
Robyn Klingler Vidra
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Robyn Klingler Vidra

Robyn Klingler-Vidra is a Lecturer at King's College London in the Department of European & International Studies, a Senior Research Fellow at the Coller Institute of Venture at Tel Aviv University and the Research Manager for the World Economic Forum Global Competitiveness Ranking Executive Opinion Survey for the United Kingdom. Robyn’s research focuses on government efforts to build venture capital markets as a means to promote innovation, economic growth and entrepreneurial clusters. She leads the World Economic Forum’s UK Executive Opinion Survey on global competitiveness and is an instructor for LSE Enterprise executive education courses on capital markets, economic competitiveness and innovation. Her publications include peer reviewed journal articles on the development of venture capital markets in East Asia and how policy models transform as they diffuse. She has also published a number of policy papers on economic growth and a working paper on the social impact of business. Before returning to academia, Robyn spent eight years in the financial sector, working as a financial institutions' liability underwriter, a research manager at an expert network firm and an investor relations manager at a fund of hedge fund. Her public sector experience includes internships with the Economic Section of the US State Department Foreign Service and in the Westminster office of a UK Member of Parliament. She received her BA from the University of Michigan, was a visiting scholar at the National University of Singapore Lee Kuan Yew School of Public Policy and completed her MSc and PhD in International Political Economy in the International Relations Department at the London School of Economics & Political Science. Robyn was the first-ever winner of the BISA Award for Teaching Excellence by a Postgraduate Student and holds the Postgraduate Certificate in Higher Education (PGCertHE).

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