from the November 2008 issue

The Global Chaos and Israel

More and more people at this end of the world, are wondering as to how the American financial crisis will affect the local economy. The Governor of the Bank of Israel Prof. Stanley Fisher has assured us, that our economy is stable and will remain so. However, at least two major banks, Bank Hapoalim and Bank Leumi have announced that so far the losses connected with the fall of Lehman Brothers alone, have totaled more than $200 million. Other investment houses have not reported losses but we can rest assured that they have also suffered from the debacle.

The fallout may have a greater effect on the economy if the American consumer begins to buy less. "The increase in exports this year is surprising since theoretically, the appreciation of the shekel and the global slump should have resulted in a drop in exports," said economist Rafi Melnick, deputy president of the Interdisciplinary Center in Herzliya. "The explanation is that specific types of exports are growing." However, the export statistics relate to data from the beginning of ther summer.

America, India and China are the leading customers for Israeli goods, especially high-tech and defense materiel. The demand for these goods will is likely recede as time moves along, as both countriers achieve a high level of armaments. Another factor is the surprising strengthening of the Israeli currency which makes goods more expensive. Israel is a major exporter of finished diamonds. The demand for diamonds is expected to drop sharply.

Though there is no major concern about a spillover from the American financial crisis there are some indications that all is not well or as was. Perhaps the first sign, from an industry insider, that the venture capital industry, has almost completely closed the tap on new funding. They are assuming a wait and see attitude. Their main concern being that they may lack funding to back existing investments.

The other negative indicator is a lack of interest in the Tel-Aviv Stock Exchange. Initially, many cancelled their pension funds and other long-term investments. The head of a financial management company conceded that he doesn't remember a decline of up to ten percent, in the month of September. The fall was mainly due to a steep decline in the price of bonds, a main component of pension fund holdings.It is also possible that one of the country's large real estate companies, with international holdings, may run into difficulties.

On the more positive side, is Israel's proven ability to adjust to changing economic conditions. Israel does not produce automobiles where the production cycle is four years. Most high-tech companies are able to adjust their production to changing demand..

Israel's economy has grown by more than 5% annually, over the past three years. Indications are that this figure will fall to a still respectable 4.2%.

Israeli investors are a nervous lot. In September alone there was massive selling of long-term savings instruments as the public seemed to lose confidence in the stock market. On the other hand, there have been major gains over the past two years and the investors were selling profits. We spoke to an American, the head of an international organization, who bemoaned losses in his portfolio. "This definitely puts off my planned retirement date," stated the American.

However, experience has proved that Israel has been flexible and should withstand even an extended global recession. We are reminded that during Israel's several wars the economy never stalled. Factories did not close and companies delivered international orders.

A sign of confidence in the future was the presence of more than 40,000 Israelis who came to hear a concert by the Former Beatle Sir Paul McCartney They paid up to NIS 5,000 ($1,400) a ticket. They seemed to have confidence in the future.

Reprinted from the Israel High-Tech & Investment Report November 2008

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