SHALOM

Israel astonishes – Israel surprises! Always and forever and in every field. Technological advances, medical breakthroughs, individual performance and revolutionary discoveries are part of everyday reality. Yet here is the Jewish State going it alone in a world where economies have been profoundly shaken up for a year now. Curiously enough, the tsunami in world finance has not destabilized the Jewish State. In the face of this phenomenon, the best informed observers remain perplexed, as we do too.
That is why we contacted Dr. GIL BUFMAN, Chief Economist of Bank Leumi in Tel-Aviv, who had already analyzed the sharp rise in the Shekel and the Israeli economic situation for us in Shalom Vol. 49 (www.shalom-magazine.com).

So what is this special blessing that has so benefited the Israeli economy while the world of finance has been foundering in the depths of capitalism’s hell?

When we look at what has happened in the Israeli economy over the past year, everything indicates that it definitely managed to survive the crisis better than most other countries. For example, if we take a look at changes to GDP (Gross Domestic Product) over the last six months (last quarter of 2008 and the first of 2009), for which we have comparative data for the preceding six months, we see that overall GDP fell sharply. This was particularly so in the most advanced countries in the Far East, such as Japan, Singapore and Taiwan. These Asian markets were effectively wiped out, with their exports based above all on consumer goods (cars, electronics etc) to the USA and various western countries. In the US and Western Europe economic activity was down about 6%, while in Israel GDP dropped by only 1.5%, which is very little in comparison with countries to which the Jewish State is often compared.

Is this chance or some particular providence?

It is certainly not chance, and a quick analysis will throw up several objective reasons. Firstly, certain countries, such as the USA, Spain, the UK and Ireland, suffered from an enormous and exaggerated real estate investment bubble. In Israel the situation was exactly the opposite, with the supply of unsold real estate at its lowest level ever. This can be explained by the very large wave of immigration in 1990 having been accompanied by a very big wave of construction. So to start with there was a large supply, which with time ran down since in parallel the population was increasing. So in fact just when the real estate bubble was bursting around the world, in Israel real estate supply was at its lowest. About 30,000 new apartments are put on the market each year for almost 40,000 new households.
Today one of the key elements in the Israeli economy is the residential property market, however, there are already very serious signs that supply in the non-residential market is at its lowest. This is also due to the fact that the Israeli banks are very strict, with quite draconian conditions and requirements for granting building loans. As a result and contrary to other countries where the real estate sector had been pulling both the economy and the banking sector downwards, in Israel the opposite has been the case. Another interesting matter is that Israeli consumers have shown that they are very solid and have shown that they are clearly able to react. This too is not due to chance, since the rate of individual savings is among the highest in the world. A large part of such reserves is incidentally retained at source and placed in various provident and pension funds. Employees are increasingly benefiting from mandatory contributions by employers. Thus when times are tough, most Israelis have a small reserve to help them survive.

If this is really the case, how do you explain that Israelis just complain, saying it is hard to make ends meet at the end of the month and that they have huge debts at the bank?

That is quite simply because people do not take their savings into account and consider them as set aside and untouchable. However, this is not right, since some provident funds are highly liquid and can be touched without incurring a penalty. What’s more, the money is managed by institutions that are very tightly supervised by the Finance Ministry and the Bank of Israel, which demand a particularly high level of transparency. Savers are thus not exposed to the types of swindles that have been seen in the USA. So we have this form of automatic savings that in times of severe recession ensure that consumption does not crash as drastically as in other countries. Which is why the period of a drop in consumption was very short in Israel and we are already seeing a reversal of direction. Incidentally, recent credit card usage data and private consumption indicators have been rising since June 2009.

The shekel has remained strong. How do you perceive this phenomenon?

For the same reasons I gave last year. Despite the worldwide situation, notwithstanding the local situation and contrary to European countries, we are continuing to see an uninterrupted flow of foreign capital into Israel. It is generally intended for long-term, strategic investments. Investors all over the world purchase shares in major real estate projects, hi-tech companies, telecoms etc. In addition, Israelis have generally stopped investing overseas, especially in Eastern Europe. I believe this reflects a trend that will continue. The local real estate market has remained very attractive because there is almost no supply, while the birth rate is about 1.8%, which is four times that of Europe and double the USA. This creates demand both in real estate and private consumption, two key elements in the economy. To this should be added that Israeli consumers do not hesitate to use their disposable savings to maintain their standard of living, notwithstanding the temporarily difficult economic situation.
Lastly, it is not just that we have this mass of external capital that is flowing in, but we also have extremely large reserves of foreign currency. We also enjoy a permanent surplus in our balance of payments. A quick glance at those countries most affected by the crisis shows they all have one thing in common, a negative balance of payments. The average deficit of the US has been about 6% while that of Eastern European countries is between 15% and 20%. All those countries with deficits have faced a monetary crisis. Thus, in one Eastern European country where mortgages were directly linked to strong currencies, people who had taken out loans and whose income was in local currency saw their debt increase drastically from one day to another. This is definitely not the case in Israel, and everything points to the fundamentals being there for the Shekel to remain strong in the future. So monetary risk is not one of the concerns here, which also explains in part the country’s economic stability. The situation is quite different from what we have seen in other countries such as Ukraine for example, which saw a giddying rise and even faster fall in investments. They were obliged to take several billions in loans from the IMF to avoid the collapse of their economies. All this has meant that the drop in the Israeli economy as compared with other nations has been relatively marginal and much less than that of the 30 countries of the OECD, which Israel is shortly to join. Since the start of the year the Israeli stock exchange has behaved very well, almost like the best markets in the world, but without the same risks. It is no coincidence that Morgan Stanley has just changed Israel’s status from an emerging market to a developed one. We are forecasting a recovery in economic growth in 2010.

But have not exports been severely affected?

Not really, and the fact is that exports are by no means everything that affects the state of the economy. What’s more, when you take a closer look at Israeli exports, you will observe that we do not export consumer goods or those used in construction, those two areas of exports worldwide that have been the worst hit. We exports products for which demand has remained relatively stable, such as generic medicines, hi-tech specialized in services, both software and hardware, and chemical and agricultural products. Together these areas represent almost 70% - 80% of our exports, which are in sectors that have not been badly hit by the crisis. It is true that unemployment is most visible in hi-tech, but most Israeli companies were prepared for the crisis and had started taking steps since mid-2007, such as partnering with foreign companies, or making agreements with their staff, who in order to keep their jobs accepted either a temporary reduction in their working hours or their salary. Compared with the major hi-tech crisis of 2001, this one has not been dramatic. There has certainly been a slowdown but not an effective shrinkage in activity. To this can be added that the Israeli banking sector has made serious profits. In a nutshell, the crisis was above all a financial one and Israel is not a financial giant. We are a giant in hi-tech, which has only been slightly affected.

How do you see the future?

As far as the USA and Europe go, I believe the recovery is going to be long and slow. If these countries manage to stabilize their economies to non-negative growth in 2010 (as against what is happening at the moment), that will already be a very big step in the right direction. I do not believe the level of economic growth we saw before the crisis will be achieved in less than four or five years. Having said which, you need to understand that all the positive elements in the Israeli economy today are the result of past decisions, taken by Prime Minister Benjamin Netanyahu when he was Finance Minister. It will be interesting to see how the new government will prepare for the economic future and what initiatives it will take to ensure that the country’s economic potential continues to grow in the coming five to ten years.

What about tourism?

In terms of GDP tourism is only a marginal activity, representing just 5%, including associated activities such as taxis, cafes and restaurants. What’s more, inbound tourism to Israel is very dependent upon the world economic situation. It is interesting to note that during the military offensive in Gaza in January 2009, tourism dropped less than in previous security crises. However, even if tourism represents a small percentage of GDP, it is of major importance in employment, because hotels alone represent 5% of the labor market. As you can see, GDP is not everything.
In conclusion I can say that the Israeli economy is both healthy and solid. I believe we will be back positive towards the end of this year or during next year. Here the recession will have lasted all in all less than a year.