BIBI BULLISH ON ISRAELI ECONOMY TO CODEL ISSA

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 002271

SIPDIS

E.O. 12958: DECL: 04/19/2009
TAGS: ECON EFIN ETRD ELAB PREL IS ECONOMY AND FINANCE
SUBJECT: BIBI BULLISH ON ISRAELI ECONOMY TO CODEL ISSA


Classified By: DCM Richard LeBaron, per 1.4(b) and (d).


1. (C) Summary: An ebullient Binyamin Netanyahu told CODEL
Issa April 14 that Israel's economy is continuing to improve
now that reforms are beginning to take effect. Netanyahu's
"success" in battling the unions, GDP growing at 3 percent
this year, pension reform, and lower taxes are all
contributing factors. The GOI intends to keep its focus on
reducing the deficit and to invest in infrastructure,
including the completion of the Trans-Israel Highway, as well
as a rail system to connect Ashdod port with the Red Sea port
of Eilat. It further intends to reduce the number of foreign
workers in Israel to lower the unemployment rate among
Israelis and thus reduce state expenditure on welfare
benefits. CODEL Issa raised concerns about U.S. companies
being shut out of competition on the natural gas pipeline
network and cellular phone contracts, both of which Netanyahu
promised to look into. A Bank of Israel official was also
upbeat on the direction of the Israeli economy, but cautioned
that the GOI still had some way to go in its reforms. End
Summary.


2. (C) An energized Binyamin Netanyahu told Congressman
Darrell Issa and House International Relations Committee
staff member Hillel Weinberg April 14 that the Israeli
economy is moving in the right direction under his guidance
at the Ministry of Finance. Charge d'Affaires Richard
LeBaron also attended. Opening the meeting, Netanyahu said
that in his two-year tenure to date union wages had been
lowered, the government's work force reduced by 2 percent,
the VAT lowered to 17 percent from 18 percent, and the income
tax reduced as well. The economy is currently growing by 3
percent and the stock market has risen by 100 percent since
last year, he added. Crowing over his victory against the
unions, Netanyahu described how he had wrested control of the
pension system from the unions and raised the retirement age
from 65 to 67 in order to pay for necessary restructuring and
to balance the books. The next and last step is to privatize
the union pension system and the state-owned banks.
Netanyahu said that he intends to decrease the number of
foreign workers in Israel in order to reduce the number of
Israelis living off of the state's welfare benefits. This
would, in turn, contribute to a lowering of state
expenditures. Although many of his reforms are unpopular (as
demonstrated by the number of strikes Israel has weathered),
Netanyahu said that he had taken a lesson from U.S. Federal
Reserve Chairman Alan Greenspan who applies two questions to
evaluate the health of an economy to gauge the health of the
Israeli economy. First, is the stock market rising? The
answer, he said, clearly is "yes." Second, are the rates for
long-term bonds falling? Again, Netanyahu reported the
answer in Israel was a resounding "yes." Saying his main
report card is the behavior of the markets, Netanyahu clearly
thought he had scored well.

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Investing in Infrastructure
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3. (C) Netanyahu announced that the GOI intends to construct
a rail line as a land bridge to connect the Red Sea port of
Eilat with the Mediterranean port of Ashdod, the goal being
to develop a route to compete with the Suez Canal. Goods
would move by rail to Ashdod and then by ship across the
Mediterranean. Netanyahu pointed out that almost two thirds
of all shipping containers currently return to Europe from
Israel empty; the new rail line would make filling the
containers easier, in particular facilitating the movement of
Dead Sea minerals to the coast for export. Netanyahu also
said that the GOI is investing in the completion of the
north-south Trans-Israel Highway, which will assist in
opening up the southern regions of Israel, in particular the
Negev. With regard to the purchase of natural gas from
Egypt, Netanyahu said that he wants competition for all gas
suppliers, including the Egyptians, British Gas, and the
Israeli-American supplier.

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"Level the Playing Field for U.S. Business"
--------------


4. (C) Congressman Issa congratulated Netanyahu on all of
the reforms that have been implemented during his tenure at
the ministry, but noted that the VAT, even at the new rate of
17 percent, remains high. Netanyahu agreed, adding that he
hopes the rate will go even lower in the future. Turning to
the development of a domestic pipeline for gas distribution,
Congressman Issa stressed that by hiring a Dutch firm to
design the pipeline, Israel appears to have committed to
using Dutch specifications for the pipeline's construction --
a situation that clearly cuts out American firms from the
process, despite the fact that U.S. technology is the world
standard. Netanyahu agreed, seemingly surprised by the news.
He said he would look into the matter.


5. (C) Moving on to cellular communication, Congressman Issa
said that the United States wants only a level playing field
for U.S. companies to enter the market. For example,
Qualcomm is a world leader in CDMA (code division multiple
access) or fixed wireless technology, but not on the GSM
system standard used in Europe and in some countries of the
Middle East. In Saudi Arabia, the SAG had held an open bid
for the cellphone system, but only on the GSM system, leaving
no room for CDMA despite CDMA's far lower cost for domestic
users and an area where U.S. firms such as Qualcomm excel.
Issa asked that Israel leave room for both technologies to
develop and let the markets themselves decide which will
predominate. Netanyahu said that Israel intends to privatize
Bezeq (the Israeli telephone service) and he promised to
examine the possibilities of taking the two-system approach
advocated by the Congressman.

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Israel Bank Also Upbeat
--------------

6. (C) Karnit Flug, head of research at the Bank of Israel,
was somewhat less ebullient than the FinMin, but still upbeat
in her April 14 discussion with HIRC staff member Hillel
Weinberg. Flug said that while there had been an initial dip
in the Israeli economy in 2001, it is difficult to determine
how much of that could be related to the Intifada and how
much to the poor state of the world economy at that time.
The effects of the Intifada were initially felt in areas such
as tourism, but those effects gradually spread to other parts
of the economy as investors realized that the uncertainty
connected with the Intifada was going to be a longer term
phenomenon.


7. (C) Flug reported that the spike in unemployment in year
2000 had leveled out in 2003, with the export sector clearly
leading the recovery. The GOI is serious in its efforts to
limit the number of foreign workers in Israel, the number of
whom almost matches the current rate of unemployment. Flug
disputed the conventional wisdom that foreign workers take
jobs that Israeli citizens would not. As an example, she
cited the approximately 35,000 Israeli Arabs who had been
employed in the construction industry up until the
mid-1990's. Now, because foreign labor is so inexpensive,
virtually all of the positions are now held by foreign
workers.


8. (C) Calling the current government's fiscal policy "more
responsible and determined," Flug gave FinMin Netanyahu high
marks on his willingness to take tough measures to reduce the
deficit (Note: the goal for 2004 is 4 percent. End note).
That, in turn, allowed the Bank to ease interest rates. She
cautioned, however, that the GOI still has a long way to go
to reduce the size and cost of government expenditures.


9. (U) CODEL Issa did not have an opportunity to clear this
message.

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