The Bank of Israel today published its Annual Report for 2008. At the press conference accompanying the release, Governor of the Bank of Israel Prof. Stanley Fischer said, "The financial situation abroad and in Israel is beginning to stabilize thanks to the unprecedented actions by central banks and treasuries, including in the US, England, and Europe. This is the good news."
Fischer cautioned, however, "The situation in the real economy continues to deteriorate. As a result, we'll see an increase in unemployment in Israel in the coming months. This is not unusual. The financial situation always improves before conditions in the real economy."
Earlier today, when presenting the Annual Report to President Shimon Peres, Fischer said, "In my opinion, we have coped well with the crisis, but we haven’t yet reached the nadir of the recession."
The Bank of Israel also took the opportunity to revise its growth forecast for 2010 downward to 1% from 2.3%.
In the Annual Report, the Bank of Israel states, "Despite the precautions, the continuation or further worsening of the recession may push the deficit to an unexpected level and endanger fiscal credibility. In such a case, the deficit increase may be restrained by postponing the tax cuts that were planned for 2010 or suspending some of the proposed measures. Apart from increasing expenditure, the expenditure ceiling should be raised to allow the government to fund credit and guarantee programs."
This statement is an indication of the Bank of Israel's open opposition to initiative to pursue more tax cuts. During the election campaign, Prime Minister Benjamin Netanyahu promised to carry out, and even increase, the pace of tax cuts.
The Bank of Israel notes that whereas Israel's debt/GDP ratio is high compared with the OECD average, the tax burden has fallen in recent years and is even below the OECD average. For this reason, pursuing tax cuts does not fit in with the need to increase budgets and reduce the debt/GDP ratio.
As for the Brodet multiyear defense spending plan decided on by the Olmert government as well as plans for education, welfare, and infrastructures, the Bank of Israel says that performance of these plans will force the government to raise taxes or make drastic cuts, amounting to more than NIS 16 billion in 2010-12, otherwise government debt will balloon to a level that will jeopardize the economy's financial stability and expose it to real risks.
Despite the need to increase the budget deficit in the short term in order to cope with the economic crisis, the Bank of Israel says that the primary fiscal target must focus on reducing Israel's debt/GDP ratio, which is liable to grow in the coming years.
In the section on the lessons of the financial crisis, Bank of Israel states that it is necessary to adjust the regulation of nonbank financial institutions and place them under tighter supervision. The supervision of non-bank financial institutions, insurance companies in particular, should be tightened. These institutions have become main players both in lending and in managing the public’s savings. The conflicts of interest in their activities should be narrowed and the composition of their portfolios and risk exposures should be placed under restrictions, especially in regard to portfolios that they manage for savers approaching retirement age. The structure of incentives for those who manage the public’s savings needs to be dealt with to discourage them from taking excessive risks."
The Ministry of Finance's Capital Markets, Insurance and Savings Supervision Division, currently headed by Yadin Antebi, is responsible for oversight of the non-bank financial sector. The Annual Report is quite critical of his performance.
The Bank of Israel calls for greater transparency of composite financial instruments and securitization transactions, as well as for the implicit risks in portfolios managed for savers, especially where long-term savings are concerned. It also calls for improved accounting and disclosure of off-balance sheet instruments and the exposure related to investing in them, as well as of the valuation rules for non-tradable instruments.
As for rating agencies, the Bank of Israel notes that they "play a central role in the development of the crisis abroad and in Israel. Reliance on them in making investment decisions should be reduced, financial intermediaries should be required to assume greater responsibility for the evaluation of implicit risks in investments, the rating process should be improved, and conflicts of interest should be dealt with."
The Bank of Israel notes that Israel's securitization market, in contrast to other developed countries, "is only in its construction phases." It advises that the lessons accumulated abroad should be applied to reforms in Israel in order to avoid a regulatory lag as the market evolves. "Care should be taken to keep assets simple and transparent so that investors and rating companies may understand them, and caution must be used in devising the structure of incentives in the market."
The Bank of Israel also revised its 2010 unemployment forecast to 8.3% of the civilian labor force. This amounts to 247,000 unemployed persons, compared with 202,000 today. It also expects the budget deficit to amount to 6% of GDP in 2010.
Published by Globes [online], Israel business news - www.globes-online.com - on April 19, 2009
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