Posted tagged ‘finance’

Election economics in Israel (2)

October 3, 2012

It is  nearly a month since I raised the hypothesis that a general election campaign could herald an unexpected benefit to Israel’s economy. Simply put, the law of the land will force the government to enact a temporary budget for early 2013. As this must be based on the 2012 budget, opportunities for unnecessary spending will be limited.

A month later, an amazingly long time in Israeli politics, and itis near certain that the country is heading for an election around February 2013. Ostensibly, the issue is that the Prime Minister, Netanyahu, and his Defense Minister, Barak, have fallen out with each other. Maybe. Theirs was always a love of convenience.

It could be argued that Netanyahu wants to pull the country behind him, as he has to reach crucial decisions over Iran. Very Churchill-like, but not very convincing.

The truth is that Netanyahu’s problem has been around for months and his elastoplast of spin is failing to cover up a bigger and bigger wound. The government has a major hole in its finances. The only way to grab control of the debt is to attack the very issues that are sensitive to his coalition partners. To be specific:

  • Barak, a former commander-in-chief, wants to add billions to his defense budget. Meanwhile, the treasury is demanding a cut of up to 4 billion shekels or US$1 billion.
  • The ultra-orthodox parties, known as a large family sector, are fanatical defenders of the high child benefits. Netanyahu has always been seen as their patron. However, now the  treasury is looking to cut around 20% or 2 billion shekels of these handouts
  • Without explaining here the historical irony, the core in the party of Netanyahu’s central committee, comes from the public sector. The treasury is hoping to cut wages and jobs by 4 billion shekels.

If you have not got it, there are two issues. First, Netanyahu probably does not have enough Parliamentary support for a tough budget. Second, rather than make the challenging economic decisions now, Netanyahu is playing politics with the one aspect of his political life where he has achieved outstanding success; finance and commerce. He is doing what he does best – nothing, delaying, putting off the inevitable and thus hoping something will come up that will allow him to get beyond the electoral process, while risking economic failure.

Today’s newspapers show that exports to Europe dropped 21% in July – August 2013 compared to 2012. VAT may have to go up 1% in January 2013, in addition to last month’s increase. Unemployment is on the rise. An editorial in the Jerusalem Post newspaper correctly argues that:

The downside of calling early elections is that  there will be no new fiscal budget prepared for the first months of 2013.  Instead, the 2012 budget will remain in effect without the necessary adjustments  made for population growth and inflation. And none of the pressing economic  issues will be addressed. A proper 2013 budget will probably not be in place  until May or June.

True, but there is also an upside. Similar to the previous elections after the global crisis in 2008, the government in Jerusalem will find it very difficult to spend its way to election victory. Yes, the existing budgetary gaps will remain, but they should not become more exaggerated through additional fiscal negligence. How the experts at the Bank of Israel will respond to this irresponsibility will be interesting to observe.

Cash flow and budgets – the difference and their importance to small companies

August 1, 2012

Last week, I answered the question “who needs to be concerned about cash flows?”.

A couple of days ago, I was giving a talk to some academics about how to start up a company. A question arose that confused the terms of budgets with cash flows, and even managed to mingle in the concept of profit and loss statements. So, I thought that I should return to the above theme from a different angle.

Assume that you are at the planning stage of setting up a company or have only been going a short time. You rightly feel that it is time to assess what everything will cost you and if it can be matched by potential revenues. This is the budgeting process – collating all known and relevant information going forward over a period such as the next quarter or year. And now, your budget for pre operations may shape differently to current operations, once you have started to turn over sales.

Great, but the bottom line is not necessarily your profit, (or loss), which is actually determined by how the transactions are recorded on your accountancy package. And just because you have rigged the numbers to show a healthy and positive figure, this does not mean that you will not need to be running to the bank for bridging loans!

There are two common reasons for this misfit: –

  • More often than not, you lay out expenses before you receive income
  • You have outlays – for example VAT or sales taxes – which are cash flow items, and these are not part of a planned budget.

In other words, cash flows and budgets are two separate but linked financial issues, which all companies have to assess.

To take this one stage further, I have suggested to several clients recently that they prepare a daily cash flow projection basis. Their objections have been numerous, usually based on how can they predict cash moevements when there is so much uncertainty. After all, they have budgets, which show in the long term how things will work out.

And here’s the point. I remind these same clients that they are being hounded by the banks because they cannot meet immediate payment demands like suppliers or wages. Change and survive, or I say to them. Welcome to the world of building simple and practical spreadsheets, which highlight your money problems well in advance. Welcome to the world of predicting cash flows.

Israel’s financial planners – differentiating spin from the truth

July 30, 2012

The OECD has warned Israel for months that Jerusalem’s budget did not add up. The newspapers of been full of similar articles. Finally last week, the Israeli treasury moved to plug a 14 billion shekel – say US$3.5 billion – gap in the finances. Loads of new or higher taxes. And as is common in such situations, the lower and middle classes will take the brunt.

Well, the recognition of defeat will be welcomed by the financial markets. However, there is general acceptance that there is more to come.

What concerns me, and I have stated this before, is that these measures were clearly issued in haste. For all the pessimistic forecasts, those in (so-called?) control did not listen. For example, it is less than a month ago that the Finance Ministry announced that certain import tariffs will be reduced over the next three years. That same decision was revoked last week.

Israel is not as badly off as other countries. It is no Greece nor Spain. Its growth is far superior to that of France and the UK. That said, eight million citizens deserve a better performance from their fiscal planners than served up to date in 2012.

It is with some irony that the one bright spot has come from the roads. Israel’s transportation system still leaves a lot to be desired. Nevertheless, the installation of new road safty cameras have created of new profit centre, as the fines have poured in. This is one step to be welcomed…..until I get caught(?).

Israeli economy & government intervention

July 31, 2010

However you twist the figures, the speed of the Israeli economic recovery is slowing down. The latest report from the Central Bureau of Statistics argues that: –

Economic indicators for the April- June period point to a continued slowdown in the pace of growth in imports of raw materials, trade and services revenue, industrial production and credit-card purchases….

Over the past 6 months, annualised GDP growth has dipped off by about 1.0 % to around 3.5% . On the other hand, the predictions for 2011 remain strong.

Citigroup expects the economy to grow 3.2% in 2010 and 4.2% in 2011. The Bank of Israel forecast is for the economy to grow 3.7% in 2010 and 4.0% in 2011.

Stanley Fischer, governor of the Bank of Israel, has pointed out several times that Israel was fortunate during the initial stages of the credit crisis. As the country was going through a general election, central government was weak. Nobody in authority was around to push through a large fiscal package. Debt did not go through the roof, as in the UK and elsewhere.

Yet last week,  a report was issued in America, which details why the very opposite was true for Washington.

Alan Blinder, a professor at Princeton, and Mark Zandi of Moody’s Economics (and one of the chief economic advisors to the McCain Campaign)….. argue that without any of the responses, 2010 GDP would have been 11.5% lower than it is likely to turn out, payroll employment would have been 8.5 million lower and we would now be facing outright deflation rather than just being at risk of falling into it, as we are now.

True, the American and Israeli economies faced very different challenges 2 years ago. For a start, Israel’s banks were sound.

However, there may be a need to move the local debate along. Today, Israel’s high tech sector needs help to reposition itself. The ultra orthodox and minority communities are not engaged in the labour force as the rest of society is. Infrastructure in the north and south remains weaker compared to the centre of the country. Primary and secondary education standards are continuing to slide.

None of the these are impossible issues to resolve. All require financial direction (and leadership) from the centre. Is it time to relax the purse strings?

Israel and a Greek tragedy

May 17, 2010

Every banker is asking themselves how the knock-on effect of the demise of the Greek economy will impact on their own economy. For Israel, a 90 minute flight away, that same question is just as pertinent.

Let’s get one thing straight from the outset. The countries may share the Mediterranean sea and a love of humous. Spain and Portugal may not be far away either. But, as I wrote last week, the structure of Israel’s financial system is very different and much stronger.

That said, there are some early indications of a negative fall out. You only have to look at the shekel, which has appreciated 6-7% against the Euro and Sterling over the last 30 days. Bad news for local exporters.

Both amongst the manufacturers and exporters organisations, there is deep concernFinancial markets are on the defensive. And such a feeling of uncertainty is often reflected in people’s hesitation to buy goods and services. Potentially more bad news.

Israeli companies have several options. One is to explore new markets. At Expo 2010, Finance Minister, Steinitz, signed a wide ranging financial agreement with his Chinese counterpart. I have lost track of my friends who have made commercial trips to India over the last 12 months. Foreign Minister Lieberman was in Japan last week.

In contrast, the domestic market is not necessarily available to local manufacturers. It is often considered less profitable, where terms of credit are very stiff. Further, statistics released yesterday reveal that the consumer upsurge at the end of 2009 continued by only 1.6% in the first quarter of 2010.

Where to next? The stability of the Israel’s fiscal and monetary policy indicate that although the Mediterranean waters may be choppy, the long term should be a smooth sail.

What Obama learns from Israel….and her economy

March 28, 2010

So President Obama and Prime Minister Netanyahu are not friends this week – at least not on the diplomatic front.

Turn to economics, and Obama’s ears are carefully tuned to what is coming out of Israel. It is an accepted fact that Israel’s financial planners read the credit crunch correctly. Stanley Fisher, governor of the Bank of Israel, has long been a mentor of Ben Bernanke, his American counterpart.

It turns out that one of Bernanke’s predecessors, Paul Volcker, is also a big fan of Fisher. This is all the more intriguing, when you consider that Volcker is one of Obama’s main fiscal advisors.

Sever Plocker, a leading Israeli financial commentator, recently attended a function for an Israeli bank, when Volcker was present. To translate and quote Volcker’s reply to a question:

During the crisis, you (Israel) did all the right things. And now you are reaping the rewards. But before the crisis, a long time beforehand, you realised that you needed to invest in r&d, in education and in knowledge……..You have a wonderful central banker….and I admire the budgetary capability and management of your Finance Ministry…..Don’t squander your successes.

Volcker is known to be very impressed by the way Israel had imposed controls and supervision on its banks, after previous local failings. Apparently this is one of Obama’s next important policy moves, and he has been advised by …..Paul Volcker.

Looking closely at what Israel does – Economy

September 18, 2009

As Moslems and Jews prepare to celebrate important festivals in their respective calendars, the first item noted how the Palestinian economy is moving forward. The two major factors have been reduced violence, ensuring increased Israeli cooperation and input.

Here, I consider how Israel has long been known as one of the key hightech centres of the world. Siemens, Microsoft, Google, Intel and many other multinationals have strong r&d centres in the Holy Land. More recently, Jerusalem has led the revolution in new solar and water technologies.

Just take some specific items of news from the past week alone.

Techcrunch is a premier competition for start ups. 4 Israeli or Israel-connected companies were in the top 6 places. This includes the eventual winner, Red Beacon, connecting consumers to local services.

N-trig, a major player in the touch screen market, has secured a major contract with Lenovo, China. N-trig’ duo sense, 4-fingered application will enable the latest notepad features.

Brainstorm Cell Therapeutics Ltd is about to commence a pre-clinical safety trial for the company’s innovative therapy for ALS – Lou Gehrig’s disease. The CEO announced that they will use a locally based contract research organisation (CRO),as it will be better received by regulatory authorities.

And the list goes on – Israeli tech having a direct impact on the lives of millions around the globe. Imagine what would happen (or not happen) if this Middle East version of Silicon Valley did not exist.

A year ago, the credit crunch grabbed the world. Today, the Tel Aviv stock exchange is 10% higher than 12 months ago.