New postings can be found on:
El Al – the problems of an open economy: http://www.michaelhoresh.com/holy-lesson-in-high-flying-openess/
Israel at 65: http://www.michaelhoresh.com/what-we-can-achieve-in-65-years/
Why Israel hosts 260 research centres form overseas corps: http://www.michaelhoresh.com/260-overseas-research-centres-in-israel-cant-be-wrong/
In a month’s time, Israel goes to the polls. Bearing in mind the strict proportional representational system, the trends in the polls and the country’s habit for political coalitions, it seems that Prime Minister Netanyahu will not be moving home after the votes have been tallied up.
Elections around the world are usually decided by social and economic issues. Geopolitics in the Middle East has ensured that most campaigns in Israel since 1948 have been decided on matters related to defence and foreign affairs. However, what if that were not the case? What if Israelis put more emphasis on subjects that concerned the shekel in their pocket? How should the outgoing government be judged?
Since 2008, Israel has ridden out the global financial disasters in relative comfort. The stats of 3-5% growth annually, relatively low unemployment and a stable budget deficit ratio speak for themselves. During the current term of office, the country has been admitted as a full member of the OECD and the Tel Aviv stock market is now in the top ranking. So all is good and nothing needs to change?
Whenever a general election presents itself, the local media is always on the look out for “election economics”. In its simplest form, this means a government announcing a policy – often spending lots of money – in order to secure votes. Now, Netanyahu’s team cannot be accused of that. They have sat tight.
And that’s just the point. The Israeli economy is in urgent need of leadership and direction, but none is forthcoming. Everything is being delayed until after the polls have closed and after a new coalition has been formed. That could still be months away. Meanwhile, the politicians are busy praising themselves and past achievements,
Stanley Fischer, the governor of the Bank of Israel, put the matter out in the open for all to see. There is a gaping hole of 15 billion shekels, equivalent to nearly 4 billion dollars. How will that be tackled? Raising VAT by an additional 1%? Cutting back on child allowances? Cuts in the budgets of government services? According to newspaper reports, all this and more is being considered, but nothing is definitively planned. And so the budget debt will continue to grow.
As for public utilities, many services will announce prices from February onwards, well after the elections on 22nd January. The Electricity Company has been forced for months to buy supplies of gas from more expensive sources, due to crumbling relations with Egypt. Water prices, that have already soared 35% in three years, are due for another hike imminently. And when the middle classes receive their monthly pay cheques in early February, they may notice that their tax brackets have been changed adversely.
So what does this all add up to? The Israeli economy is not broke, but many things need fixing. The current government appears to be saying that it will carry on as normal, although it is obvious that this is short-term posturing. Painful changes will come into effect by Spring 2013, and the average citizens will pay for most of them. However, by then, they will have cast their vote. By default, that is another, yet short-minded and dangerous, form of election economics.
Less than three weeks ago, the OECD published a healthy review on the Israeli economy – 3% growth running through to the end of 2014. This outperforms many other countries in the organisation. So, why is the Israeli media full of depressing financial reports? The answer lies in a mixture of issues that have come together at once.
First, it has been known for around six months that tax revenues has not been hitting targets set. However measured, the gap stretches to billions of dollars. Raising VAT has helped, but not enough. So, the government merely changed the proposed fiscal deficit from 2% to 3% of GDP.
Clever political accounting maybe, but now 3% looks like breaching the 4% mark. The defense budget was never fully covered from the outset of 2012. The activities over Gaza last month have added around half a billion dollars in extra bills – reservists, ammunition, etc. And that very military campaign has resulted in a severe drop in tax revenues from businesses in the south of the country. To give one piece of anecdotal evidence – one of my clients had a prospective customer cancel on him at the last moment because his income from the south had evaporated.
The politicians have another problem to deal with – themselves. They have called a general election for the 22nd January. That means that the government is trying to devolve all sensitive issues until after that date. For example, the prices of many milk products, staple items for much of the public, are regulated. Changing an earlier announcement, they will only rise by 5% at the end of January. Bread will go up by 4% in early February. Electricity charges will jump by 10% in April, once many consumers have finished heating their homes for the winter.
Again, maybe a nifty political tactic, but what about the public coffers? The treasury will have to subsidise some of the differed costs. And that will bring us back to the story of the worsening fiscal deficit. It all makes for a nasty and bitter recipe of problems.
The OECD was fundamentally correct. Economically, the country has much to look forward to. For example, by late 2014, Israel’s new-found gas reserves will start to come on tap. These will ensure cheaper gas for consumers. Relatively expensive imports will be eliminated, thus improving Israel’s standing vis-a-vis overseas creditors. And there will be extra tax revenues available to finace public projects. A great main course for the mouths of the whole country.
Until then, Israelis deserve to be served a better first course by its leaders. Specifically at the time of elections, what is required is responsible financial measures rather than verbal spin.
Unemployment jumps to 7.3%. Housing starts down. OECD marginally lowers growth forecast. Not the greatest series of economic news that Israel has seen in recent weeks.
And yet right beneath those one-off headline items is a major piece of commercial joy that bodes well for the future of the country. To paraphrase statements from Bill O’Neill, Merrill Lynch’s Wealth Management chief investment officer for Europe, Middle East and Africa; the Israeli economy is in good shape.
It is not just that growth of 3% still puts it towards the top of the OECD pack. Nor that unemployment is remains well below many other countries. And we can already see multinationals looking to invest in Israel’s new offshore gas reserves.
Look at the level of exits in Israel during 2012. This is one of the ways that large overseas financial players judge the strength of the country’s performance. In the previous peak year of 2006, the figure reached $10.1 billion. This year, at a time when money is supposed to be tight on the global scene, $9.3 bilion has already been counted up. (Figures released at an MIT seminar in Tel Aviv on Wednesday). Cisco’s purchase of NDS is responsible alone for $5 billion.
The story does not end there. This morning’s press reveals that ”NCR Corp, a supplier of automated-teller machines and payment systems, agreed to buy Retalix Ltd, Israel, for about $650 million, gaining software and services used in supermarkets.”
I wonder who else has yet to complete their Christmas shopping amongst the Holy Land’s high tech treasure trove.
;lkch;lad
Initial estimates suggest that Israel’s economy will shrink by 0.2% as a result of the recent fighting with Gaza. Last week, I detailed some of that potential impact. But what of Gaza? How can over 1.5 million people recover from the severe pounding (literally) handed out by Israel?
A recent IMF report detailed that unemployment was still over 30% in the strip of land, locked between the Bedouin of Sinai and Israel. Much of the Gaza economy is supported by external sources, often smuggled in via the tunnel system. A video from AlJazeera illustrates this very well, filmed shortly after the current fightng had stopped. Palestinian sources imply that 140, maybe two-thirds of all operating tunnels, were destroyed. Not only does this limit the supply of goods, it removes Hamas from a very healthy supply of revenue from permits for these activities.
However, in some ways, these sketchy details highlight a deeper problem. Obtaining reliable and professional figures for Gaza in most fields is consistently difficult. Just one simple example - the number of minors killed in last week’s fighting: It will take an expert to point out that whatever the stat, and even one death is a tragedy too many, Hamas recruits fighters to its ranks from the age of 16. Thus are these deaths to be recorded as military or civilian?
Now consider the on-going poverty in Gaza, which many people take for granted. The same IMF report also mentions that the Gaza economy grew at a “high rate” in early 2012,“mainly on account of a booming construction sector that benefits from lifting of some Israeli restrictions on imports and Gaza’s tunnel trade that benefits from easing of restrictions owing to political change in Egypt“.
Statistics from the Israeli press and based on information from military sources confirm this trend. Hamas probably benefits by around US$500 million annually from the tunnel economy. While the GDP per person stands at a paltry US$1,500, it has leapt upwards by 30% since 2010. And the Israeli army has ensured that building materials, food and medica supplies continue to enter Gaza in quantity, even during the fighting.
I have commented in the past how Gaza has seen a new millionaire elite emerge in the past couple of years. New cars, often imported from China, are now common in the area. An interesting item from Eric Cunningham and dated from the beginning of the recent hostilities observed how Gaza has much wealthier base than in previous hostilities.
While thousands of Gazans flocked to the territory’s short but stunning coastline this summer, when relative peace still reigned, the abrupt bang of hammers and whir of power-drills could be heard on almost every corner of the capital, Gaza City.
Sky-scraping apartment complexes, glitzy new shopping malls and extravagant hotel retreats were sprouting up amid the rubble, and unemployment had dropped to 28 percent from a record-high of 45 percent at the height of the blockade.
Cunningham’s piece even displays a picture of the new funfair. Pointedly, he concludes by citing a second IMF analysis, posted this October. Gaza’s economy is set to grow by 7% in 2013 and 6.5% in 2014.
You are left wondering. Why does Hamas and its allies would want to jeopardise this prosperity that benefits for the Palestinians and replace it with an on-going bloody fight with Israel?
How much does it cost to run a war? Over this and the next posting, I want to look at how much Israel and the Hamas sacrified financially over each other’s skies, whilst coldly and cruelly ignoring the human suffering.
Let’s start with Israel. The larger economy by far, member of the OECD and whose stock market is ranked in the main global listing, Israel is a recognised leader in several high tech fields, such as telecom, nanotech and solar energy. The WEF ranks Israel as second in the region for financial development. despite the continuing international recession, Israel’s economy is set to grow by around 3% this year and next year.
Allowing for lost production, repairs to infrastructure, lost sales, the cost of the Gaza war to Israel’s economy could reachUS$1 billion. This figure also accounts for costs to the country’s military infrastructure. For example, each rocket fired by the Iron Dome protection system is valued at around US$50,000, and hundreds were launched successfully to shoot down Hamas missiles. And consider the expense of calling up nearly 70,000 reservists for a week, when each individual is “charged out” at just over 100 dollars per day.
Israel’s two leading finance chiefs, the Minister of Finance and the Governor of the Bank of Israel, have both gone on record to say that the economy’s overall performance will not suffer. Stats registered after previous campaigns, such as Gaza in 2005 and Lebanon in 2006, suggests that the gentlemen may be correct. An interesting piece of anecdotal evidence already reveals that local retailers in those areas where rockets landed did much better than the larger chains. The reason is that people did not travel far to discount houses and were less interested in shopping at malls. Thus, one up for small business, always a vital part of a strong economy.
As the Financial Times newspaper notes, the Israeli economy is resilient to such events. After all, the stock exchanges and foreign currency rates barely moved this week afer the initial shocks were placed in perspective.
I would add a note of caution. During the previous economic quarter, the manufacturing index had shown an impressive jump of over 15%. However, once you drill down into the stats, you see that they were driven by an exceptionally strong performance from the high-tech sector. For each of the past two quarters, it has leapt forward by nearly 30%.
In comparison, the returns from the traditional industries – chemicals, plastics, food, etc – are in the minus zone. It is these sectors, where people are employed in mass. Their factories are often located in peripheral areas, such as in the south. And it is the south of the country where most of the 1,200 rockets fired by Hamas landed, causing production lines to cease working. It is here that the economic planners, located far away behind their desks in Jerusalem, need to focus their reconstruction efforts.
Pick up any UN analysis or a report from a relevant NGO, you will find details of how Gaza’s economy is struggling. The facts seem overwhelming – how unemployment, low exports, little private sector growth.
For all the pages of statistics, something does not add up. According to the World Bank, under 30 years of Israeli sovereignty, the Palestinian economy grew by 5.5% annually in real terms until 1999. That is phenomenal by any standards, and Gaza was part of that achievement.
If you look for current information about Gaza, which has not been tampered by officials with an agenda to grind, then there is much anecdotal evidence. I have reported on the new cars from China that have become very popular in recent months. These have probably been purchased by the new elite of millionaires club, identified by the Arab media. And all this has been reported by corporate journalists staying in some very comfortable boutique hotels.
Life for people in Gaza is not simple. Israel limits travel on its side, although even in times of war passage is not totally closed off. The Egyptian border is open, but Bedouin tribes control the territory beyond. And the Hamas government runs an agenda that bothers little with principles of democracy and pluralism.
If the citizens of Gaza complain that Israelis live in a secluded paradise, one can understand their frustration. Since freeing up the economy from tariffs in the mid 1980s, Israelis has experienced a leap forward in standards of living. Today, the economy is growing at around 3% annually, one of the better performers in the OECD. JVP in Jerusalem is one of the world’s most successful venture capital groups in the world, reinvesting profits in cross-ethnic projects. to take a specific industry, the biotech sector has boomed in the past decade, creating thousands of jobs and billions in wealth.
Historically, Gaza has been known as a fertile territory with an educated populace. When Israel departed in 2005, it left behind and intact a thriving greenhouse industry. Not only has that been ransacked and confined to the sand dunes or converted to military training grounds. The leading export in 2012 has been the 1,200 rockets hurtled towards Israeli civilian areas.
The Palestinian leadership in Gaza would have the world believe that the poverty of the territory is caused by the Israeli military. The pain of that fallacy is most felt by the residents themselves. However, if only the problem was a few gross inexactitudes over economic policy.
As Hamas has proven, if you can lie during peacetime, it does not take too much effort to cover up the self-inflicted horrors of war.
In the mid 1980s, the Israeli government froze wages, prices and any other financial mechanism it could find in order to conquer hyperinflation. Then, over the following three decades, the protected economy of the Holy Land moved from being based on agriculture, textiles and tariffs to a “start up” success”.
There are those critics that argue that not enough large companies have emerged. Too many exits is the cry. And the new wealth has not been spread equally.
On the other hand, statistics reveal that ”65% of Israeli start-ups actually make it past the elusive fifth year in business“. And I would argue that even without more large companies, the start-up phenomenon has been an amazing success. New jobs in new sectors have been created. Investments have flown in, especially into the Tel Aviv Stock Market. Employment is holding up despite a global recession. Israel has been able to join the OECD.
One simple way to analyse Israel’s success in the new industries – telecomm, cleantech, nanotech etc – is to look at the number of patents applied for. Since the year 2000, Israelis have registered around 7,000 patents per year, significantly more than countries like Switzerland, Germany and the UK. To take one case study, IBM has the largest single number of patent registrations in the USA. Around 8% alone emerge out of its Haifa-based research lab.
All very praiseworthy, until you look at what is happening in Israeli universities. Yes, they live up to their reputation and turn out all sorts of wierd and wonderful ideas, which are converted into Intellectual Property (IP). For example, “40 per cent of all Israeli start-ups are incubated by Technion (University in Haifa)”.
However, it turns out that hundreds of patents are unlikely to be commercialised. According to a table in last Friday’s financial paper “Calcalist”, citing seven leading academic institutions, over 2,100 patents have not found a commercial developer after twelve months. Most of these belong to the Weizman Institute, the Technion and the Universities of Tel Aviv and in Jerusalem.
It would be an interesting economics paper that would calculate the potential loss to the economy of this non-corporate activity. That said, I think it is fair to assume that the size of the forfeit can be described as significant! Daft, at the very least.
There again, a few weeks ago, the Israeli government pulled the plug on the heart of its mentoring programme for small businesses, which these patents are often part of. From the good to the sad to the stupid.
Yet another IMF conference about the global banking system is not something to set you alight, even if it features the largest bank from your own country – Bank Hapoalim from Israel. As to be expected, the prophets of gloom were out in full: “The global economy is facing its third major brake on expansion in five years as emerging markets slow from China to Brazil, provoking debate about how much policy makers should respond.”
However, this time there was an interesting spark to the story. It is not just that the IMF presented a reasonably optimistic forecast for Israel - 2.9% in 2012 and 3.2% in 2013. I was more interested in the reports back from the Bank of Hapoalim delegation.
It is evident from the comments that the Israelis were often met with the question: “How do you guys do it?” In other words, how does Israel succeed to beat the global recession, and near consistently so, when others fail?
Well, a comprehensive revelation of the secret lies beyond the scope of a blog. Point to the skills of Governor of the Bank of Israel, Professor Stanley Fischer. Discuss the benefits of a start up economy. Consider the Israeli character to push beyond challenges. etc etc.
There is one interesting case study that conveniently illustrates what I am saying. I have read that sales of new cars in the EU were down 11% in September 2012, compared to a year previously. And yet the President of Seat cars, James Muir, has identified Israel as a key market for further expansion. In an interview in the Hebrew press last Friday, he stated how the commercial set up in the Holy Land allows for companies to move very quickly from second-rate status to major brand.
There is an old zionist phrase which dates back to Theodore Herzl: “Where there is a will, where is a way”.
The Israeli electorate will go to the polls on January 22nd 2013. This is about ten months earlier than required by law, but compared to predecessors over the past decade, the outgoing government has lasted a long time.
Historically, the main debates between the parties have centred on geopolitics; defense, Palestinians, relations with America, etc. However, there have been increased tendencies in recent campaigns to stress social and economic factors. Given the impact of new social movements over the past two summers, that impetus is likely to remain.
So how do you judge the performance of the outgoing government with an all-time record of 30 ministers? What have they achieved on the economy?
An interesting position was taken by Dr Yuval Steinitz, the Finance Minister, who has proclaimed that the politics of the next few months will not encroach on past gains. After all, a series of stabilising measures were enacted just recently in July. And the Bank of Israel, led by the renowned and venerable Professor Stanley Fischer, encouragingly believes that:
Notwithstanding the recent slowdown, there are a number of indicators showing that there is a high level of activity in the economy, which may help the Israeli economy should a crisis erupt in Europe. The output gap that is estimated through various methods has been hovering for a long time around low values. The unemployment rate has been at 7 percent since the fourth quarter of 2011—a low level in historical terms. This low unemployment rate exists despite the fact that the participation rate in the labor market is at an all-time high of 63.6 percent. In parallel, there is an upward trend of 2 percent in real salaries since the beginning of 2010 (they are still 2 percent away from the all-time high levels prior to the crisis), and there is a high rate of available positions.
Journalists are taking a somewhat more critical (naturally, sic) viewpoint, looking at past political promises and comparing them to deliverables. A typical example can be found from ”Ha’aretz“, which essentially gave ministers a ‘thumbs down’. The newspaper’s conclusion is that aside from growth, Netanyahu’s government has failed on the economy.
I am not sure. Let us start at the beginning, as they say in the Holy Land. Israel faces a strain on its budget that few other countries have to deal with - a persistent and real threat to its survival. Defence expenditure is about 6-7% of the whole budget, absurdly large compared to most of its fellow OECD members and yet low compared to its hostile neighbours. And then if one adds on to that burden the global downturn that has dogged the government during its tenure, it becomes clear that Israel has faced a “double whammy” for much of the past four years.
To give credit to the mandarins in Jerusalem, the economy has moved forward. Growth in 2008 and 2009 was 4% and 0.8%. The IMF assessed global progress at 3% and then down 0.6% for the same period. Going forward, Israel has achieved 4.8%, and 4.7%, with 3.2% growth expected in 2012. Global stats are 5.1%, 3.8% and 3.3%. Israel has performed well.
I could complain that the government has failed to deliver reform in two highly protected and sensitive areas; releasing public land for housing development and the distribution of fruit and vegetables. The former ensures that housing remains near unaffordable for young first-time buyers and is creating a dangerous market bubble. The latter allows farmers and wholesalers to maintain high prices to the public, while overseas competition is kept out of the market.
Not good. But that is not my major concern. Benjamin Netanyahu’s government has kept a balanced set of accounts for most of its period in power. Yet, it is going to the polls with a 14 billion nis (US$3.5 billion) gap in the budget. At the moment, there are only tenuous thoughts on how to cover the difference, and many of these are clouded by political party conflicts.
Simply put, this is irresponsible! This shows a lack of leadership. It endangers the potential benefits to be gained in 2015, as gas revenues should come into play. And it clouds the seriousness, even legitimacy, of any electoral message that may be thrown to the public over the next few weeks.
How will voters view this deficit? Will they be put off or will they be more concerned about negotiations with the Palestinians and how to handle Tehran? By January 23rd 2013 the world will know. Yet however many millions turn out to cast their ballot, the sign for 14 billion shekels cannot be hidden for ever. Time for somebody to take responsibility.
