The new Israeli shekel for the most part has been a relatively stable currency over the last decade. The economy rebounded from an economic slowdown that began in 1997 lasting until mid-1999 when real GDP growth surged by 5.5 percent. However, the fallout of the Russian financial crisis and other global economic hotspots including Asia during 1997-98 led to an exchange rate shock and devaluation of the shekel in late 1998. During December 2001, the Bank of Israel (BOI) cut interest rates by 2 percentage points thus resulting in a quick responsive 20 percent depreciation versus a currency basket for the shekel. Similar to many other countries in 2001-02, Israel has been greatly impacted by the slowdown in the global economy coupled with increased domestic security concerns. In 2003, even with the heightened state of security with frequent suicide bombing attacks, the shekel has held remarkably steady against both the Euroland euro and the US-dollar (‘USD’). From 2002, the shekel has experienced a 10 year bull market run versus the USD reflecting its dynamic impressive economy and sound political management.
POLITICS: parliamentary democracy. The State of Israel was established in 1948, national security and its existence remains politically its number one issue. The conflict with Palestinians has brought terror to Israeli citizens. In fact, more Israeli citizens die in traffic accidents each year than by the violence resulting from bombings, etc. An American poll conducted by Newsweek in 2002 suggested that only 34 percent of Israeli adults thought Israel would remain a Jewish state in 50 years’ time. At present, Israeli-Arabs consist of 22 percent of Israel’s population coupled with the fact that they have a much higher birth rate than Jewish Israelis. Over the long term, Jewish Israelis may indeed be the minority.
ECONOMY: advanced diversified market economy that is integrated into the global economy with a large component of government participation. The domestic economy has experienced a mild recession during the global financial crisis of 2008-2009. Strong real GDP growth during most of the 1990’s resulted in a great rise in Israeli living standards (until 1997 when GDP growth fell by 2 percent) of which this economic growth was partly derived from a massive influx of 800,000 Jewish immigrants from Russia 1989-97. From year 2003 - 2007, the Israeli economy displayed tremendous economic growth and prosperity with strong economic GDP growth rates.
The economy has diversified into hi-tech, biotechnology and e-commerce/knowledge based industries. It is this hi-tech area of the economy is blossoming with Israel home at an advanced market economy. Industries include tourism, cut diamonds, agricultural (fruits & vegetables) defense contractors, high-technology products, biotechnology / pharmaceuticals, medical, aviation, computers, large infrastructure projects, large public sector including banks and power (i.e. electrical), etc. Imports for Israel include rough diamonds, military hardware, oil, grain and consumer goods. Persistent current account deficits have been offset by transfer payments and foreign loans as the United States has been a large source of economic aid including military hardware shipments. Since the 1973 accord, the United States provides Israel with $3 billion USD per year in aid of which $2.2 billion USD is directed towards U.S. military hardware and $800 million USD as a financial grant.
The Palestinian-Israeli conflict ten years ago when the Palestinian intifada started in September 2000, the Israeli economy became more isolated. It is estimated that the conflict cost Israel upwards of $1 billion USD/year in loss economic output from lower tourism arrivals, lower construction starts and declining agricultural output which ultimately led the economy to recession in year 2003. If this conflict can be solved, peace would result in an economic boom for Israel and an even stronger shekel. For comparison, Palestinians living in the West Bank and Gaza, unemployment & poverty is at over 50 percent reflecting a huge disparity in wealth to Israel.
Economic Statistics
GDP (2010) as measured by purchasing power parity is at $220 billion USD with corresponding GDP/Capita at $29,800 USD. As measured by market prices, GDP stands at $213 billion USD. GDP growth rates include year 2011 estimated at 4.8 percent, 2010 at 4.6 percent, year 2009 at 0.2 percent, 2008 at 4 percent, years 2004-07 at 5 percent. Inflation quotes include 2010 at 2.7 percent, year 2011 at 3.4 percent, 2012 estimated at 1.6 percent. Historical inflation quotes include year 1998 at 8.6 percent, 1999 at 1.3 percent, 2000 at zero, 2001 at 1.4 percent and 2002 at 6.5 percent. Current account is currently in surplus at 1.2 percent for 2011 estimated, year 2010 at 2.2 percent, year 2009 at 3.9 percent. Fiscal budget deficit projected at 3.4 percent for 2011. Gross external debt is at 112.4 billion USD (2011) although net external debt is low, public debt at 75 percent of GDP. Unemployment for year 2011 is at 5.5 percent, upwards of 19 percent living below poverty line. Services represent 67 percent of the economy. Remittances from Israeli citizens abroad are worth $300 million USD/year. Market value of Israel’s publicly traded equities measured at $218 billion USD (2010). Taxation at 28.5 percent of GDP, electricity - balanced. Major trading partner: United States
POSITIVE: life expectancy average is 81 years, high literacy rates, modern telecommunication system, free trade agreement with the United States; many Israeli companies abroad are doing well with head offices based in Israel. CONCERN: security issues, environmental, oligarch control over majority of Israel’s economy.
BANKING SYSTEM: official reserve assets held at the central bank stand at an impressive 78 billion USD (2011). In 1992, the central bank follows monetary policy in an inflation targeting framework with a target rate of 1 to 3 percent as of year 2003. Policy interest rate increased to 2 percent (October 2010). Historical system banking collapse occurred in October 1983.
REGIONAL ANALYSIS: Egypt, Jordan, Syria, Lebanon, Iran
At present, Israel holds military superiority in the region. If the region could secure long-term peace, an unprecedented economic boom would result to the benefit of everyone. It is unlikely a violent confrontation between Israel-Egypt will return as Egypt would lose their U.S. annual economic subsidy.
For further discussion on Israel’s security issues, please contact BankINTRO.com.
KNOWLEDGE: The Discovery of Oil – Energy Wealth
The Shfela Basin located about a 30 minute drive south of Jerusalem, Israel is one of the greatest discoveries in recoverable shale oil energy wealth outside of the United States and China. With estimated oil reserves at 250 billion barrels, Israel’s oil discovery is on par with Saudi Arabia’s vast oil wealth. Quite possibly by year 2016, Israel should begin initial production of this valuable natural resource as the country is currently a net oil importer.
CURRENCY: ISO Symbol ‘ILS’, new Israeli Shekel, Israeli New Shekels, sheqel. At time of review on October 24, 2011, the shekel had an exchange value of 3.6517 ILS to 1 USD and/or 5.0637 ILS to 1 Euroland euro (EUR). During June 2002, the record low for the shekel came as the currency almost fell below 5 ILS to the USD only after when Israeli interest rates were raised to support the shekel. The shekel is fully convertible as all capital controls have been removed. As measured by purchasing power parity as of October 21, 2011, the shekel was 2 percent overvalued to the USD which is an effectively balanced valuation.
CURRENCY HISTORY: Israeli New Shekel replaced the Old Shekel on January 1, 1986 at a rate of 10,000 Old to 1 New Shekel. The Old Shekel replaced the Israeli pound at one Old Shekel to 10 pounds. The shekel has performed very well over the last few years. Historical valuations include the average exchange in 1994 valued at 3.01 ILS to 1 USD, November 1995 at 3.067, December 1996 at 3.27, January 1997 at 3.27, January 1998 at 3.57, January 1999 at 4.08, October 1999 at 4.27, September 2001 at 4.337, June 2002 at 4.935, February 2003 at 4.86, October 2003 at 4.419,, January 2004 at 4.42, January 2005 at 4.379, January 2006 at 4.618, January 2007 at 4.23, January 2008 at 3.739, January 2009 at 3.916, January 2010 at 3.711, January 2011 at 3.583. Currency crisis dates include March 1991.
CURRENCY FORECAST: dynamic strong economy although risk variables include geo-political regional security issues as conflicts that have historically involved Israel has spurred inflation risks within Israel such as the case in 1984 when inflation spiked at 400 percent. At present, economic domestic risk is noticed in the Israeli housing market that has run up 40 percent in the last three years due to low interest rates and easy credit – a housing correction would put a drag on economic growth. On the plus side, the shekel is strongly supported with large foreign exchange reserves as they adequately cover short-term liabilities and healthy capital account surpluses from FDI, grants, foreign aid and remittances.
