Israel is booming and open for business
Last year the demand was so high, it could have sold $5.5 billion of the government debt instruments, but Israel needs to borrow only $2 to $3 billion each year, said Zvi Chalamish, chief fiscal officer of the Government of Israel’s economic mission in New York.
Because the economy is so strong, each year Israel can follow through on its proclaimed policy of reducing its national debt (the accumulated total of all the funds it has borrowed).
Chalamish was in Toronto recently to discuss investment opportunities in Israel at a breakfast meeting sponsored by Israel’s economic mission to Canada.
In an interview with The CJN, he painted a rosy picture of the Israeli economy, which he said continues to chug along at an annual growth rate of around 5 per cent. In 2006, despite the month-long war with Hezbollah, the economy grew 5.1 per cent.
Canada, by contrast, grew its economy by 2.8 per cent in the same period; red-hot Alberta registered a 6.6 per cent expansion. Between 2000 and 2004, StatsCan reported, Canada’s growth outstripped that of all other G8 nations, with annual average rate of 3.1 per cent.
“Our economy is functioning very well,” Chalamish said.
Though Israel is poor in natural resources, it does have other selling points. “Our main resource is engineers. We have more engineers per capita than any other country in the world.”
They help fuel the country’s high tech industries, which, along with mixed high tech/traditional industries, accounts for 90 per cent of all exports. Stereotypical Israeli exports, like oranges and other foods, account for only 7 per cent of exports.
The international demand for Israeli products and services produces a 5 per cent current account balance (a surplus of exports over imports), he said.
Last year, foreign investment in Israel totalled more than $20 billion, mostly in the high tech sphere. However, one prominent American investor chose to put $4 billion in what was not a pure high tech play. Warren Buffet’s Berkshire Hathaway purchased an 80 per cent stake in Iscar, a privately held Israeli cutting-tools company. It was Buffett’s first-ever acquisition outside the United States.
“This is the best example we can use, that Warren Buffett, who is well known, his biggest investment overseas is in Israel,” Chalamish said.
Chalamish acknowledged that security concerns have dissuaded some from investing in Israel, but that appears to be changing. More investment deals in 2006 were signed in Israel during the war with Hezbollah or after than before, he said.
“If we have a good business [opportunity], the war or the area won’t interrupt investment,” Chalamish asserted. “Investors should realize you don’t have to go with helmets in the centre of Tel Aviv.”
International investors are increasingly coming to recognize that “Israel is open for business. Israel is attracting foreign capital and the private sector is leading the economy. Our private sector has the ability to grow very fast. We have the ability to be part of the global economy and to develop new things. We just needed to give the private sector the ability to develop new things and raise money. Now they are running very fast.”
Chalamish, whose New York office manages Israel’s foreign debt and sets Bond rates, said Israel’s economy began its turn around in 1985 when a stabilization program was introduced to tackle 400 per cent inflation.
In 2003 steps were taken to make the economy “more open.” Israel’s policy now is to reduce taxes and permit the private sector to retain more of its earnings. Interestingly, tax revenues have increased as the rates have gone down, he said.
The government has invested in infrastructure – two desalination plants produce 15 per cent of Israel’s drinkable water, rising to 25 per cent in the next two years – reducing the likelihood of a conflict with its neighbours over the precious resource, he said.
Despite Israel’s glowing economic record, Chalamish acknowledged the country must offer bond investors a premium “because of our neighbourhood. Our credit rating is A. It would be AA without the neighbours.” (Concerns over war make investors jittery; credit agencies reduce Israel’s rating and investors require a greater return before they will invest in jurisdictions with lower ratings.)
In 2006, bonds issued by Israel – half through Israel Bonds offices, half through financial institutions – sold for 98 basis points over the 10-year U.S. treasury rate. In 2004, the premium was 115 basis points.
The lower premium is an indicator of investor confidence, he suggested, adding “Israel today is well known in the business sector for our economic advantages.”