Identifier
Created
Classification
Origin
06TELAVIV1946
2006-05-18 15:45:00
CONFIDENTIAL
Embassy Tel Aviv
Cable title:  

ISRAEL'S NEW FINANCE MINISTER COMMITTED TO FISCAL

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181545Z May 06
C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 001946 

SIPDIS

NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS, GREENE,
WAECHTER; NSC FOR ABRAMS, DORAN, LOGERFO; TREASURY FOR
ADKINS

E.O. 12958: DECL: 05/17/2016
TAGS: ECON EFIN EAID PGOV PREL IS KWBG KPAL ECONOMY AND FINANCE
SUBJECT: ISRAEL'S NEW FINANCE MINISTER COMMITTED TO FISCAL
RESTRAINT


Classified By: Ambassador Richard H. Jones for reasons 1.5 b and d.

-------
Summary
-------

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 001946

SIPDIS

NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS, GREENE,
WAECHTER; NSC FOR ABRAMS, DORAN, LOGERFO; TREASURY FOR
ADKINS

E.O. 12958: DECL: 05/17/2016
TAGS: ECON EFIN EAID PGOV PREL IS KWBG KPAL ECONOMY AND FINANCE
SUBJECT: ISRAEL'S NEW FINANCE MINISTER COMMITTED TO FISCAL
RESTRAINT


Classified By: Ambassador Richard H. Jones for reasons 1.5 b and d.

--------------
Summary
--------------


1. (C) Finance Minister Hirchson told the Ambassador that
the new government would continue to practice fiscal
restraint, and will resist strong pressures from members of
the coalition to open the spending floodgates. He pledged
that the 2006 budget would not be renegotiated and would keep
to the one percent limit on year-to-year expenditure
increases, while adjusting spending to address the needs of
those most hurt economically by earlier cuts. He also said
that streamlining regulation and bureaucracy would be a major
GOI goal. On the shekel check clearing issue, Rani
Loebenstein, Senior Advisor to the MoF DG, said that the GOI
was working with the Israeli banks to come up with a creative
solution that would allow the banks to continue their
relationships with Palestinian banks. Hirchson lauded recent
good news for the Israeli economy, and was especially pleased
about the Buffet purchase of an Israeli company, noting that
such "non-Zionist" investment for the purpose of making money
sent a good signal to investors around the world about the
excellent investment opportunities available in the country.
He also discussed the importance of tourism to the Israeli
economy, saying that he considered it a "strategic" industry
which brings in cash and creates jobs. The Ambassador also
raised the possible use of customs revenues for humanitarian
purposes and the Joint Economic Development Group (JEDG)
anticipated for the fall. Hirchson expressed great interest
in attending the JEDG. End Summary.

--------------
Continued Fiscal Restraint
--------------


2. (C) Newly-installed Finance Minister Avraham Hirchson,
his Financial Advisors Benny Ayal and Kobi Shalom, and Senior

Advisor to the DG Rani Loebenstein met with the Ambassador,
DCM, Economic Counselor, and Deputy Economic Counselor on May
16 at his office in Jerusalem. Hirchson was pleased to point
out the excellent news that greeted his first week in office
-- the report of 6.6% growth in the economy during the first
quarter of 2006, the Warren Buffet USD 4 billion cash
purchase of eighty percent of the Israeli firm Iscar, the
purchase by Deutsche Bank of a portion of Israel Discount
Bank (IDB),and the positive reviews of the Israeli economy
by investment houses and ratings services. On a cautious
note, however, he pointed out that the 6.6% growth number was
only for the first quarter and that he was part of a
government whose members "all want to spend money." After a
comment from the Ambassador, Loebenstein brought up Israel's
commitment to the U.S. to maintain fiscal restraint (as part
of the 2003 Loan Guarantee Agreement - LGA). Hirchson
emphatically stated that the GOI would continue to be very
careful and act with the same restraint it has displayed in
the last three years.


3. (C) Hirchson noted that as Chairman of the Knesset
Finance Committee while Benjamin Netanyahu was Minister of
Finance, all of Netanyahu's economic reform proposals had to
pass through him and his committee on the way to becoming
law. He called himself a full partner in the reforms, and
said that he would speak out publicly on the need to continue
to act with fiscal restraint (see comment below). The most
important thing is investing in people's future, not simply
giving them handouts, although help will be earmarked to
reach the population groups most in need. The enormous
social welfare spending prior to 2003 had no real payoff, and
the most important thing to do now is to invest in putting
people to work. In response to the Ambassador's question
regarding financial promises made to bring parties into the
coalition, Hirchson said that those expenditures amount to
less than one half percent of the budget. He then stated
very firmly that the 2006 budget would not be reopened -- as
doing so would send a very negative signal for next year.
Spending growth would remain at about one percent this year.
The 2006 budget passed its first reading in the Knesset last
week, and there are now about 35 days left to get it passed.
He vowed that the government would be strong and keep to the
restraints embodied by the budget.

--------------
Streamlining Bureaucracy and Regulations
--------------


4. (U) Hirchson said that continued reform of the banking
system is important, and that it is vital to overcome the
problem presented by the over-regulation of the economy in
general and the banking system in particular. The 2007
budget will include a noticeable effort to streamline
regulations and the bureaucracy.
--------------
Shekel Check Clearing for Palestinian Banks
--------------


5. (C) Regarding the shekel check clearing issue,
Loebenstein assured the Ambassador that the GOI takes the
issue very seriously and is working with the Israeli banks
involved to find a solution. He could not guarantee that it
would be solved, but noted that Hapoalim's July 5 service
cutoff date left ample time to come up with creative ideas.
Any resolution would require steps by both the banks and the
government, and Loebenstein expressed confidence that the
issue would be dealt with satisfactorily.

--------------
Non-Zionist Investment is Best
--------------


6. (C) Regarding Warren Buffet's investment in Israel,
Hirchson lauded it as very important, saying that Buffet is
not investing for "Zionist" reasons, but rather because he
thinks he can make money. In addition, the Deutsche Bank
decision to participate in the sale of IDB, which it had been
hired to broker, and the positive reviews of the economy by
investment houses and ratings services have all sent strong
signals to other investors that Israel has good investment
opportunities. The Ambassador mentioned that it might be
worthwhile to emulate other countries such as Brazil by
establishing a country specific "Israel Fund" for trading on
a U.S. stock exchange, to make it easier for those desiring
to invest in Israel. Hirchson appreciated the idea and noted
that the USD seven billion York Fund is interested in
investing in the country, as is the Markstone Fund.


7. (U) While saying that Israel has a strong lo-tech sector,
Hirchson stressed that Israel excels in hi-tech, and needs to
take advantage of this strength. As an example, he cited
Israel's water industry. Israel suffers from severe water
problems and has developed innovative ways to deal with the
problem. Hirchson said that with sufficient investment,
Israel could ultimately export up to fifty or sixty billion
shekels a year ((USD 11-14 billion) worth of hi-tech
solutions for the growing world-wide water industry. The
Ambassador remarked that Israel's water expertise could serve
as a bridge in its relations with its neighbors, and Hirchson
added that water desalinization is also a key to successful
development in the Negev.

--------------
Eilat-Aqaba Airport
--------------


8. (C) Hirchson talked about the importance of tourism to
any Negev development plan, and how, as Tourism Minister, he
went to Las Vegas to discuss bringing casinos to Eilat and
developing a Las Vegas-style "Strip" to attract up to one
million European tourists a year. When the Ambassador
mentioned a possible joint-Israel-Jordan airport in
Eilat/Aqaba, Hirchson said that it was a good idea, but that
the Jordanians withdrew their interest in the plan "at the
last moment." (Note: According to officials from OPIC - the
Overseas Private Investment Corporation - the Jordanians are
very interested, but the Israelis are hesitating because of
security concerns. End Note). Hirchson said it seemed the
idea was still a bit premature but that Israel remains
interested in pursuing it. The Ambassador offered to ask
Embassy Amman look into clarifying Jordanian views on the
issue.

--------------
Tourism a Strategic Industry
--------------


9. (U) Hirchson said that he sees tourism as a "strategic
industry" for Israel -- one that brings in cash, provides
employment, and spurs development. He added that Israel is
on track this year to have three million visitors, and that
the country is becoming a regular destination for cheap
shopping and beach vacations for Europeans. He also
mentioned the potential of the Evangelical Christian theme
park development on the Sea of Galilee to which Israel
contributed 500 dunams (about 125 acres),and which will
generate USD 50 - 70 million in investment.
--------------
Customs Revenue, JEDG
--------------

10. (C) On the issue of funds transfers to the Palestinians,
the Ambassador noted that while it is important to isolate
the Hamas government, it is also vital to make sure to
prevent a humanitarian crisis in the territories. As such,
the Gaza border crossings should be kept open as much as
possible, and Israel should consider the possibility of using
some of the PA customs revenues it is holding to alleviate
humanitarian problems in the territories. Hirchson responded
that the Prime Minister is mindful of these issues and that
they will work on them together. The Ambassador also raised
the JEDG meeting to be held in Jerusalem later this year, and
Hirchson expressed great interest in participating.

--------------
Comment
--------------


11. (C) After the meeting, Hirchson issued a public
statement, as he had told the Ambassador he would. The
statement emphasized that the GOI is committed to the one
percent expenditure increase for 2006, and that there is no
contradiction between a responsible fiscal policy and the
implementation of steps to reduce social gaps. It also noted
that deviating from the budget framework to which the
government is committed, among others to foreign entities
(Note: this refers to the U.S. - Israel LGA),could be a
risk to continued economic growth. End comment.





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