from the November 2006 issue

Israel is experiencing post War in Lebanon Blues

Israel has always been a small country with big shocks. A state commission of inquiry, to determine the responsibility of the poor performance of the Israel Defense Forces, and the management of the war by the government has not been put into place, as yet. Bickering among the top echelons of the army is prevalent and getting considerable exposure in the local media.

Investigators are questioning the Prime Minister's purchase and sale of real estate. Moreover the president, whose role is mainly ceremonial, is facing criminal charges related to sexual harassment. The former Minister of Justice is facing criminal charges related to sexual harassment and another Member of Knesset is facing charges for improper political appointments.

Any western country faced with such a plethora of problems undoubtedly would be experiencing a plunging stock market and a steep devaluation of its currency. Yet, not only is this not happening but also, as we write, the stock market has climbed 10%, in the past month and the Israeli Shekel has revalued sharply against the US dollar.

The state of the Israeli economy is a clear manifestation of this. It is the product of a responsible fiscal policy. This year, the Israeli economy is estimated to grow at an annual rate of at least 4.6%. It is a higher rate than that of Euro-currency countries and the United States. It is an achievement that is being reached despite the military campaign in Lebanon, and despite the forecasts predicting that the fighting would impede growth. Moreover, 2006 will yield a positive balance of some $6 billion export surplus over imports - an all time high.

Foreign investment in Israel has already reached $16 billon this year, which is also a record. Furthermore, the State deficit is expected to be less than 2% despite the considerable growth in security expenditure following the military campaign and the heavy costs involved in rehabilitating the north.

Additional explanations behind the buoyancy of the currency and the stock market are clearly traceable to the highly visible return of the foreign investor. Several months ago several billions of dollars of investments in emerging markets were taken of the table. If not for the War in Lebanon, Israel would have probably been the first market to feel the return of the international investor. When a foreign investor buys Israeli shares he must convert his dollars to shekels, giving the Israeli currency a sharp upward lift.

So while Israelis go about the putting of their political house in order they can be encouraged by the resilience of its economy and stellar performance of its financial markets.

Reprinted from the Israel High-Tech & Investment Report November 2006

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