Israel's increased integration into international financial
markets heightens the importance of an economic policy that aims
at adopting international standards.
The Annual Report for 1999 of the Controller of Foreign Exchange,
which appeared today, describes and analyzes economic activity
connected with nonresidents (in local and foreign currency, in
Israel and abroad), as well as developments in the
NIS/foreign-currency market and in assets and liabilities
denominated in and indexed to foreign currency.
The main points of the report are as follows:
During 1999, which began in the shadow of the global financial
crisis and of shocks to the NIS/foreign-currency market in the
last few months of 1998, there was a turnaround as regards
capital inflow and the foreign-currency market. This was due
inter alia to the influence of these events on foreign investors
and Israeli residents.
Net investments by nonresidents in shares of Israeli companies
rose sharply in 1999, reaching a record level of $ 3.5 billion.
This was the result of Israel's comparative advantage for foreign
investors in the context of growing world eagerness to invest in
high-tech companies, reflected in steep increases in this
industry's share prices abroad. In addition, foreign investors'
assessments of the yield and risk involved in investing in
Israel, in light of the effects of the global financial crisis of
the end of 1998 and recovery from it, also served to increase
their investment in Israel. Note that the demand for investment
in high-tech companies caused Israeli companies to prefer to make
share offerings abroad, leading to a sharp change in the
composition of the portfolio of nonresident investors. Their
investment in Israeli shares traded abroad increased while there
were liquidations of shares traded in the Tel Aviv Stock Exchange
(TASE). In 1999, as in previous years, nonresidents did not act
on the basis of considerations connected with the interest-rate
spread between the NIS and foreign currency, but rather from
long-term investment considerations.
The substantial rise in nonresidents' investments in Israeli
shares in 1999 has facilitated a change in the currency
composition (NIS/foreign-currency) of the assets and liabilities
of Israel's private sector since November 1998. In contrast with
previous years, in 1999 the non-banking private sector
significantly reduced its exposure to local-currency depreciation
by $ 4.7 billion, while making greater use of financial
derivatives to hedge against exchange-rate risk. In 1999, too,
this sector acted in the context of the narrowing
NIS/foreign-currency interest-rate spread, doing so however when
exchange-rate risk was higher than it had been earlier, although
this has declined during the year. The public's awareness and
assessment of exchange-rate risk rose in that period as a result
of the rapid local-currency depreciation in August through
October 1998 and the absence of intervention in foreign-currency
trading by the Bank of Israel.
In 1999 the NIS/foreign-currency market was more efficient and
responsive to market forces than in the past. During the year the
exchange rate fluctuated moderately in both directions, with a
decline in volatility compared with its peak at the end of 1998.
Against the backdrop of these developments, in 1999 there was a
match-not seen in previous years-between the non-banking private
sector's demand for foreign currency (in order to reduce its
exposure to local-currency depreciation) and the supply of
foreign currency by nonresidents as a result of their investment
in Israel.
In order to maximize the advantages deriving from Israel's
integration into the global economy while minimizing the
attendant risks, it is more important than ever to adopt an
economic policy that aims at attaining international standards,
incorporating a monetary policy that takes into account the
effect of developments in international markets in view of the
uncertainty which exists in them and which could be reflected in
volatility. Note in this connection that the persistence of
foreign investment increases Israel's sources of capital and
greatly stimulates its development. In addition, in view of the
process of convergence to a western level of inflation and the
narrowing of the interest-rate spread, the persistence of
investment contributes to stability in the foreign-currency
market, improving the efficacy of monetary policy in its effort
to attain the inflation target.
The Report makes the following additional observations regarding
Israel's external assets and liabilities (international
investment position, IIP):
In 1999 Israel's external liabilities-including shares held by
nonresidents- increased by $ 25 billion, to stand at $ 99
billion. This was due to the flow of investment by nonresidents-$
7.5 billion-and to changes in the value of total outstanding
liabilities. At the same time, the trend of reducing Israel's
outstanding net external debt continued, and it stood at $ 11.1
billion, although the outstanding gross external debt rose by $
3.2 billion.
Since the US government guarantees extended to Israel for
borrowing came to an end in 1998, in 1999 its total net borrowing
abroad fell substantially. However, the government increased its
net borrowing on its own credit in the capital markets abroad to
$ 600 million.
Nonresidents deposited a record amount-$ 2.4 billion- in Israeli
banks in 1999, while at the same time residents of Israeli
deposited a peak amount of $ 2.4 billion, originating in
offerings abroad, in banks abroad.
The rising trend of direct investments in Israel that began in
1994 persisted in 1999, and reached a crest of $ 2.2 billion.
BANK OF ISRAEL SPOKESMAN
P.O.B. 780, Jerusalem 91007;
tel: 972-2-6552712/3; fax: 972-2-6528812;
http://www.bankisrael.gov.il
This press release can be found at the Bank's website:
http://www.bankisrael.gov.il/bank-bin/eng.indx
The entire report in Hebrew can be found at:
http://www.bankisrael.gov.il/depdata/pik_mth/ann99/ann99h.htm
Chapter 1 in English can be found at:
http://www.bankisrael.gov.il/depdata/pik_mth/ann99/ann99e.htm