Thomas White Global Investing
Israel Stamp
April 17, 2009
A Postcard from the Middle East
Israel: Can the “100-day Team” Turn Israel’s Economy Around?

Israel's economy paints a gloomy picture

Israel’s central bank has tried to bolster the economy. It has taken drastic measures like cutting its base interest rate to an all-time low of 0.5% and buying dollars to weaken the shekel to help exports become more competitive. Despite this, the bank has revised its economic forecast saying the economy will contract by 1.5% in 2009, the worst performance in six decades.

Israel received a political facelift on March 31st when Benjamin Netanyahu was sworn in as the Prime Minister with a pledge to bring peace and to restructure the economy.

During his election campaign, Netanyahu promised to confront the crisis head on by lowering taxes and liberalizing the real-estate market. Specifically targeting the credit crunch, he outlined a strategy in which Israel would beef up infrastructure by building more roads and rails and use current U.S. loan guarantees to provide the necessary credit to mobilize Israeli companies. An economic transition team was set up, led by the Finance Minister Yuval Steinitz. The focus of this ‘100-day team,’ as it has come to be known, includes refinancing corporate bonds, giving loans to small and mid-size businesses, and providing government assistance to prevent more layoffs.

Netanyahu is planning to apply policies similar to those that were brought out when he was finance minister six years ago. At the time, the tax and spending cuts that he initiated pulled the economy out of the well of recession. But his strategy has not won over economists who argue that the tax reforms which steered the economy around five to ten years ago, are not sufficient to deal with the much greater challenges of the present economic crisis.

Truly, Israel is undergoing one of its worst financial challenges ever. In 2008, Israel looked as if its boat was steady enough to navigate the choppy waters of the financial crisis. Its GDP rose 4% last year after five years of unprecedented growth. But things changed in the fourth quarter when the economy screeched to a halt. Industrial production fell 1% in the last two months of 2008 while retail sales tumbled 2%. The once flourishing high-tech industry, which accounted for more than 40% of Israel’s $40.1 billion in export sales in 2008, has taken a beating. What’s more, unemployment has been rising continuously, standing at 6.8% in January and expected to top 8% by the end of this year.

Now Israel sports a growing budget deficit along with a frozen corporate bond market. The drop in exports from Israel due to the recession in the U.S. and European markets has had the biggest impact, plummeting by many rungs, at an annualized rate of nearly 25% from December to February. Most discouraging is the 10% fall in industrial exports expected this year, as exports account for about half of the GDP.

Adding spice to the simmering situation is Yuval Steinitz. Steinitz has come under the harsh glare of public scrutiny as many question the qualifications of this former philosophy professor. So much so, that former Finance Minister Avraham Shohat, who served under former Prime Ministers Yitzhak Rabin and Shimon Peres, dared to ask, “Is this the kind of person we need as our Finance Minister at a time of such an unprecedented economic crisis?”

Since its creation in 1948, Israel’s economy has always been governed by the state and the people have leaned on the state for support. Yet, amidst this political drama, the people are looking toward their leaders not only for tangible support but for the reassurance that the economy will dust itself off and rise from the ashes. Previously, Netanyahu had provided these assurances when he trimmed Israel’s budget deficit to 1.8% of the GDP in 2005 from 5.1% in 2003, garnering huge popularity among the masses. But this time he has the double task of not only turning the Israeli economy around but also the hopes of an entire population.


Image Credit: Michael Plump under a Creative Commons License

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