UNCLAS SECTION 01 OF 03 TEL AVIV 000540
SIPDIS
NEA/IPA FOR GOLDBERGER,SACHAR; EEB/IFD FOR JACOBY; TREASURY FOR
BALIN
E.O. 12958: N/A
TAGS: ECON, EFIN, PGOV, ELAB, IS
SUBJECT: DEPUTY BOI GOVERNOR SAYS ISRAEL POISED FOR STRONG RECOVERY
WHEN RECESSION ENDS
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Summary
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1. Professor Zvi Eckstein, Deputy Governor of the Bank of Israel
and Professor of Economics at Tel Aviv University says that for
Israel, the economic crisis is entirely imported. As a consequence,
Israel's emergence from its economic downturn will happen only when
the U.S. economy turns around since the U.S. is such an important
export market for Israel. He thinks that the U.S. is in for a long
downturn, which will only begin to ease in the second quarter of
2010. At that point, Israel's good macro-economic fundamentals and
export strength will position the Israeli economy to emerge strongly
from the crisis. Eckstein expressed great confidence in the
leadership of the Obama administration and the ability of its top
economic team to lead the U.S. and the world out of the crisis. He
also thought it likely that the new government in Israel would
continue the fiscally responsible policies of its predecessors. On
the issue of Palestinian workers in Israel, Eckstein said that it is
important that the costs to Israeli employers of hiring them be
equalized to the cost of hiring other foreigners in order to protect
the jobs of Israeli Arabs. End Summary.
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As the U.S. Goes...
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2. In a March 3 meeting with the Deputy EconCouns, Eckstein said
that Israel's highly important export sector makes it vulnerable to
the economic downturn in the U.S. and Europe (primarily the U.S.),
although he characterized Israel's economy as "not as vulnerable as
the economies of many other countries." He thinks that the economic
crisis will take a long time to play itself out in the U.S., and
that the Israeli economy will suffer during the entire period as
well. Using the words "deep recession" to describe what is
unfolding in the U.S. and the rest of the developed world, he called
the present financial and economic crisis "the most globalized
integrated financial crisis humanity has ever seen," adding that it
was both "unexpected" and "amazing." Noting that Israel's economy
and banking system are fundamentally sound after numerous reforms
and five continuous years of strong growth, he said that the country
can nonetheless not escape the impact of the crisis. Its strong
export sector made it vulnerable to a recession among its
"customers." A recovery in this sector will have to wait until the
advanced economies of the west, especially the U.S., begin to
recover.
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Pessimistic on Recovery but Confident in U.S. Leadership
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3. Eckstein noted that some officials in the developed world may
have hesitated to put out pessimistic forecasts in the run-up to the
crisis so as to avoid damaging the psychology of the markets.
Similarly, he thinks that those putting out an optimistic scenario
calling for recovery in the third quarter of 2009 may be similarly
trying to "protect" the markets. He said that many private
forecasters and hedge-fund managers agree with his view that the
financial sector will stabilize only in the second quarter of 2010.
According to Eckstein, the downturn in the U.S. will have a second
leg, and the worst is yet to come for Europe. While highly critical
of the European Central Bank's handling of the crisis, and going so
far as to say that it is not clear if the EU will emerge from the
crisis intact, Eckstein expressed great confidence in the Obama
administration and the U.S. economic leadership team. He said that
he is on a first name basis with the top U.S. officials and noted
particularly Fed Chairman Bernanke's expertise on the causes of the
Great Depression.
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Israel in Relatively Good Shape
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4. Eckstein said that Israel is a "small boat in a stormy sea," in
terms of its place in the overall world financial crisis. The
country has only become fully integrated into the world economy
during the last ten years, and it is only in the last five years
that its economy has really become stable. At this point, Eckstein
stressed that Israel's economy is fundamentally strong, noting the
current account surplus in the balance of payments, low level of
foreign debt, relatively reduced debt to GDP ratio, continued inflow
of FDI, the strong and stable shekel, the government's responsible
fiscal behavior, and the Bank of Israel's credible monetary policy.
In comparison with the U.S., he said that the financial sector is
quite conservative and the banking sector safe. He was, however,
less sanguine about the overall health of the insurance sector.
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Hi-Tech Down but Defense Exports OK
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5. Eckstein said that demand for exports is down substantially, and
that what does sell goes for lower prices. With that, he said that
Israel's exports are less affected than those of other countries.
Defense exports, which account for 10-15 percent of GDP have not yet
been materially affected by the slowdown. Therefore, important
companies such as Israel Aircraft Industries, Elbit, and Israel
Military Industries, which export about 70 percent of their
production, have not been hurt. He also mentioned that Teva
Pharmaceuticals, the world's largest generic drug manufacturer and a
very large player in the Israeli economy, is well-managed and doing
well. High-tech exports generally, which account for almost 50
percent of exports, are down, but are poised to recover quickly when
the recession ends due to the constant development of new products
in that sector. Eckstein also mentioned the new Intel plant in
Kiryat Gat as a major new contributing factor to Israel's basic
export strength.
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Unemployment Will Hit Eight Percent in 2009
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6. Eckstein noted that private consumption is down due to reduced
consumer confidence, with decreased expenditures on both durable and
non-durable goods. The flip side of this is, however, that Israelis
save about 15 percent of their income, which compares very favorably
with the U.S. savings rate. Unemployment is increasing, a problem
for which Eckstein saw no easy solutions. He noted, however, that
the unemployment level started at a much lower level going into this
crisis (below six percent) than it did going into the recession in
2001-2002 (about 11 percent). Eckstein expressed the hope that
continuing implementation of programs to encourage employment (the
"Wisconsin" Plan), and expanding the negative income tax will help
deal with the unemployment problem. He also reiterated the need to
reduce the number of foreign workers in Israel. Regarding some
employers' decision to institute a four day work week to prevent
having to lay off workers, Eckstein views it as a stop-gap measure,
which will delay, but not ultimately prevent the layoffs. He
forecasts unemployment of 8 percent at the end of 2009.
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New Government Will Maintain Fiscal Responsibility
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7. Eckstein called the choice of the Finance Minister in the new
government "crucial." Regardless of who assumes the position, he
does not expect a change in the policy of the last few years
vis-a-vis controlling expenditures. The difficult financial
situation should at least be helpful insofar as it limits how much
the government now being formed will be able to pay out to potential
coalition partners to encourage them to join the government.
Eckstein believes that the present annual expenditure growth ceiling
of 1.7 percent can move as high as 2.5 percent without doing much
harm, as long as it is lowered again after the crisis passes. Much
depends on why the ceiling would be raised. It would send a
negative signal if it is raised only for political purposes--for
instance, in order to increase child allowances to induce the
Ultra-Orthodox Shas party to join the government. If a pattern of
seemingly out-of-control increased expenditures develops, that would
result in higher debt at higher interest rates and an overall
increase of the interest burden on the budget, similar to what
happened in 2001-2002 recession.
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Raising Cost of Employing Palestinians in Israel
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8. In response to a question on the status of a clause in the 2009
budget arrangements bill designed to raise the cost to employers of
employing Palestinian workers and bring it in line with the cost of
employing other foreigners, Eckstein said that the bill, like the
rest of the 2009 budget submitted to the Knesset last year, had not
passed. However, he expected the new government to support it. He
said that as of 2010/2011, according to a previous government
decision, there will not be any legal foreign workers in Israel in
the construction industry; they will only be allowed to work in
agriculture and in caring for the elderly. About thirty percent of
construction work in Israel is done by Israeli Arabs, who earn about
NIS 6,000 to NIS 8,000 a month (about USD 1500-2000). Construction
workers in the West Bank earn about NIS 2,000 a month (USD 500).
Should the legislation ultimately pass in its present form, any
extra fees charged to employers to employ Palestinian workers in
Israel will be handed over to the Palestinian Authority. He views
this as a "tax" to prevent migration from the West Bank into Israel
TEL AVIV 00000540 003 OF 003
and thereby protect the jobs of Israeli Arabs. Should there be real
progress in the peace process, Eckstein said he expects the problem
of West Bank Palestinians seeking to migrate to Israel in search of
work to worsen considerably.
CUNNINGHAM