Posted tagged ‘growth’

Economic cost of war (2) – Gaza

November 25, 2012

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?

Economic cost of war (1) – Israel

November 23, 2012

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.


Hamas or Israel? The answer is in the economy

November 19, 2012

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.

So who benefits from trading with Israel?

November 17, 2012

Brighton is a picturesque seaside resort in southern England. About three months ago, the Israeli company, Sodastream, opened its first UK branch in the city. This sparked a constant flow of anti-Israel demonstrations. The protesters demand that the public boycott Israeli-made products. And their prime argument is that Israeli aggression against whoever should not be rewarded.

Why this protest on behalf of peace should see just today 15 demonstrators take on the police, I do not understand? I note that the same people are happy to buy plastic products from China or drink Russian vodka, governments not known for their delicate handling of protests. And I gather that there were few words uttered on the picket lines against the 1,000 plus rockets that have landed on Israeli civilians from Gaza during 2012.

Hypocrisy? Let’s go one step further. If the organisers were to boycott all Israeli associated products and technology, the soldiers of the seafront would not even have received their marching orders. You see in 2012 vast parts of Microsoft, Intel and mobile technology emanates from r&d centres inside Israel. That’s right, your computer and cell phone are full of made-in-Israel code.

And just how much does the world look to, support and need Israeli products and services? Just peek at these news items from last week.

  • Protalix, which has proven a unique treatment for Gaucher’s Disease, is to sign a major agreement with Brazil.
  • Sanofi-Aventis, one of the world’s largest pharmaceutical companies, has authorized Sanofi-Aventis Israel Ltd. to acquire a consumer healthcare products company for several tens of millions of dollars.
  • LiveU, which provides live video transmissions from any location with wireless networks and played a significant role in the global coverage of the London Olympics and American elections, has raised a further US$27 million.
  • P2W (pollution to water) has signed a major contract with in South Africa for purifying water in a large mine.
  • By the end of this decade, Israel will be a net exporter of gas and maybe oil energy.

And so the list goes on. In the words of the governor of the Bank of Israel, Israel’s economic growth for 2012 and 2013 is expected to beat current predictions of around 3%.

So, while the vocal and violent proponents of open speech voice their concerns on the coast of Britain, the world as a whole is benefitting from the successes of the one democratic country in the Middle East. Now, what kind of person would want to boycott that?

Judging Israel’s economy – mitigating circumstances?

October 16, 2012

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.

5 pointers on the Israeli economy

October 5, 2012

Israel is coming to the end of the celebrations of the Jewish New Year. There are increasing signs that a general election will be called for early 2013.As opposed to many countries in the democracy club, Israelis have usually considered security issues as the key determining factor for who they choose at the polls.

However, the social and economic agenda have been paramount in the local media since early 2011. With that background, I thought it would be interesting to put down some benchmarks as the election process kicks off.

1) Credit Rating: Last week, Standard & Poor’s Ratings Services affirmed Israel’s currency at the level of AA-/A-1+. In a period of global instability, that is very encouraging. Despite recognising some short term issues, such as growing budget deficits, the long term outlook is stable if not strong. In particular, the country will begin to benefit from revenues from off-shore gas supplies.

2) Tel Aviv Stock Exchange (TASE): This week, on lower trading, TASE hit a 15 month high. “Although Israeli trading volume shrank sharply  this year, in both relative and absolute terms, its relative performance last  year and over the period since the crash of 2008/09, was better than the global  average.”

3) Foreign Currency Reserves: It is accepted that Israel currently has an unexpected budgetary gap of around 15 billion shekels – almost US$4 billion. In parallel, foreign currency reserves are close to a record high, coming in at US$76 billion. With this security, the country has little problem today raising funds on the capital markets.

4) Israeli shekel: Linked to these developments, the Israeli shekel has appreciated against the dollar in recent weeks. It is now at its best trading position since mid June 2012.

5) Economic growth: For much of the past decade, Israel has recorded annual economic growth rates of 4-5%. The forecasts for 2012 were always much lower than that and there was fear a few months back that the stat would dip towards 2.5%. The latest reports are much more optimistic, as the figure will end up towards 3.3%. Exports to the USA have held up.  The jury is still out for 2013.

It cannot be denied that many food distributors have indicated that they will be raising prices in October 2012. Unemployment is on the move upwards. Budget holes must be filled eventually. Voting intentions will not solely be decided by what is happening around the Middle East scene.

However, the above analysis indicates that Israel’s economy remains fundamentally sound. Let us hope that the politicians find a way to protect this position, even as they set about the electoral ritual of carving each other to pieces.

Israel’s stock exchange takes on Iran

September 25, 2012

The Tel Aviv Stock Market (TASE) has not set alight many pockets in the past 12 months. A 5% boost is fairly modest compared to some of its rivals in the leading group of world exchanges.

With the possible exception of Mellanox, there have been very few consistent star performers. Couple that with worries over the expected growth rate for 2013, the outlook may appear to be dodgy for speculators.

That said, a number of positive factors are also smiling in the face of investors. Many people, especially from overseas, are beginning to take notice. In fact, as TASE closed trading ahead of a two-day break, it finished the day up 1.6%.

The market opened in the green and rose steadily all day long, despite the losses in European markets at the same time. Asian shares also closed lower. What stood out on Monday was the trading volume, which was over NIS 1.1 billion, some 75% higher than recent averages.

So what’s going on?

It would be trite at this stage to launch in to a discussion of economic indicators. Not all of them are positive, especially export stats for July and August 2012. Unemployment is still creeping up. On the other hand, there are signs that the government is finally beginning to take back control of the budget. The new tax law to help international firms in Israel is a step in the right direction.

However, I want to look at a poke at the geopolitical aspect. This week, the President of Iran has been addressing the UN in New York. As usual, his anti-semitism has led him to predict the end of the zionist state, sooner rather than later. For all that, the investors, as conservative as they are, are returning to the Holy Land. Just look at SingTel, one of the largest telecom companies in the world.

It is difficult to explain why or how to an outsider. For nearly 65 years, the Israeli economy has continued to progress despite genuine existential threats, and that success has been singularly marked since 2000. I do not trust Iran one iota, but I believe along with investors that Israel will come through the crisis  – safer and sounder. That is my prayer, as Israel celebrates her New Year.