Sunday, August 31, 2014

Yoram Ettinger: Is time working for or against Israel?

by Yoram Ettinger

For the first time, Israel's country default spread (2.48 percent) -- which reflects ‎the risk premium on government bonds -- is similar to that of the U.S. ‎‎(2.38 percent).

The trend of Israel's economy from 1948 until today has reaffirmed that time ‎has been working for, not against, Israel. Moreover, the ongoing ‎war, terrorism, international pressure and boycotts, which have challenged ‎Israel since its establishment in 1948, have been exposed -- in retrospect -- ‎as bumps and hurdles on the road to unprecedented economic growth.‎

The sustained, impressive growth of Israel's economy throughout ‎the last 30 years -- in defiance of endemic geopolitical and military ‎adversity -- is documented in an August 2014 study by Dr. Adam Reuter, ‎the CEO of Financial Immunities Consulting and the chairman of Reuter-‎Maydan Investment House. Israel's gross domestic product catapulted from ‎‎$30 billion in 1984 to $300 billion in 2014; per capita GDP surged from $7,000 to ‎‎$38,000; the public debt to GDP ratio shrank from 280 percent to 66 percent; the external ‎public debt to GDP ratio contracted from 55 percent to 10 percent; the budget deficit to ‎GDP ratio decreased from 17 percent to 3 percent; the defense budget reduced from ‎‎20 percent to 6 percent; annual inflation collapsed from 450 percent to 1 percent; the foreign ‎exchange reserves swelled from $3 billion to $89 billion; exports rose from $10 billion to ‎‎$90 billion; high tech exports expanded from $1 billion to $28 billion; research and ‎development expenditures to GDP ratio grew from 1.3 percent to 4.2 percent; the ‎population of Israel grew from 4.1 million to 8.2 million, etc. The growth ‎from 1948 is even more impressive: a 2000 percent growth in GDP, from $1.5 billion to ‎$300 billion.‎

Assessing the impact of the Gaza war on Israel's economy against the ‎backdrop of the three previous wars -- 2006 against Lebanon's Hezbollah ‎and 2009 and 2012 against Gaza's Hamas -- demonstrates an exceptional ‎capability to bounce back rapidly, except for the gradual recovery of ‎tourism, which accounts for 2 percent of Israel's GDP. ‎The pattern of crisis-to-recovery has always featured an abrupt and short-‎lived crisis followed by a speedy -- not a prolonged -- recovery (a "V" and not ‎a "U" shaped graph).‎

For example, according to the Bank of Israel, the 2006 war against ‎Hezbollah triggered an immediate drop of GDP from more than 6 percent to a ‎negative growth of 1.5 percent, followed by a swift recovery to almost 10 percent ‎growth in the following quarter (prior to the global economic meltdown). The ‎effects of the 2009 and 2012 wars were significantly more moderate, but ‎recovery was as rapid. ‎

The 2014 Gaza war is estimated to lower Israel's 2014 GDP by 0.5 percent. Based ‎on recent precedents, it will have insignificant influence on foreign investors, ‎most of whom seek the know-how-intensive Israeli high tech companies, ‎which are minimally vulnerable to rocket and missile fire. Moreover, the ‎expanded global interest in Israeli-developed and manufactured, battle-‎tested defense systems (e.g., Iron Dome, Trophy, etc.) -- which ‎demonstrated their unique capabilities during the Gaza war -- is expected to ‎bolster a quick recovery and the continued growth of Israel's economy. ‎

In 2014, Israel is the world's top exporter of drones, the world's co-leader ‎‎(along with the U.S.) in the development, manufacturing and launching of ‎small and medium sized satellites, the second-largest cyber exporter in the world -- ‎‎$3 billion in 2013, 5 percent of total exports and three times larger than Britain's, as ‎well as an emerging natural gas power. 

The February 2014 International Monetary Fund Israel ‎Country Report stated: "Israel has been exposed to a series of shocks, ‎including the global crisis and heightened geopolitical tensions in the Middle ‎East. Nevertheless, GDP growth has averaged 4 percent over the past 5 years, ‎compared with 0.7 percent on average for OECD countries. Per capita GDP grows ‎more rapidly than in other OECD countries." 

The three leading credit ‎rating companies, Standard & Poor's, Moody's and Fitch reaffirmed ‎Israel's high credit rating, emphasizing its fiscal responsibility, economic ‎dynamism and resilience, while lowering the credit rating of many developed ‎economies. According to the OECD annual 2013 report, Israel is the fourth most attractive country for foreign direct investment per GDP -- 4 percent, ‎compared to 1.6 percent in the top 16 economies. Warren Buffett attests to that ‎distinction: "Israel is the leading, largest and most promising investment ‎hub outside the United States." In addition, leading U.S. venture capital ‎funds established Israel-dedicated funds, and over 250 leading U.S. high tech ‎companies established research and development centers in Israel, ‎leveraging Israel's brainpower, which has become a chief pipeline of cutting ‎edge technologies; thus, expanding U.S. employment, research and ‎development and exports. Intel's recent decision to invest $6 billion in ‎upgrading one of its six Israeli facilities represents the confidence of the ‎global high tech community in Israel's long term viability.‎

In contrast to those who wish to boycott Israel, 2013-2014 has highlighted ‎Israel's expanding trade and investment global network, especially with the ‎surging economies of China, India and South Korea.‎

Is time working for or against Israel? The economic indicators from ‎‎1948 until today confirm that Israel has experienced splendid economic ‎integration and unprecedented economic growth, in defiance of ongoing ‎war, terrorism, boycotts and international pressure.‎

Yoram Ettinger


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