Identifier
Created
Classification
Origin
06TELAVIV4269
2006-10-26 14:06:00
CONFIDENTIAL
Embassy Tel Aviv
Cable title:  

BOI GOVERNOR SEES EXCELLENT ISRAELI ECONOMIC

Tags:  ECON EFIN PGOV PREL SCRM IS KPAL KWBG 
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Carol X Weakley 10/27/2006 12:22:41 PM From DB/Inbox: Carol X Weakley

Cable 
Text: 
 
 
C O N F I D E N T I A L TEL AVIV 04269

SIPDIS
CXTelA:
 ACTION: ECON
 INFO: IPSC SCI IMO CONS RES POL DCM AMB PD AID ADM
 FCS

DISSEMINATION: ECON
CHARGE: PROG

APPROVED: AMB:RHJONES
DRAFTED: ECON:JNWITOW,EWESTRU
CLEARED: DCM:GCRETZ, ECON:WWEINSTEIN, POL:PVROOMAN

VZCZCTVI533
OO RUEHC RUEHXK RHEHNSC RUEATRS
DE RUEHTV #4269/01 2991406
ZNY CCCCC ZZH
O 261406Z OCT 06
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7215
INFO RUEHXK/ARAB ISRAELI COLLECTIVE IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 004269 

SIPDIS

NEA/FO FOR DANIN; NEA/IPA FOR WILLIAMS, SHAMPAINE,
BELGRADE; EB/FO FOR DIBBLE; EB/OMA FOR GARRY; NSC FOR
ABRAMS, WATERS; TREASURY FOR HIRSON

E.O. 12958: DECL: 10/25/2016
TAGS: ECON EFIN PGOV PREL SCRM IS KPAL KWBG
SUBJECT: BOI GOVERNOR SEES EXCELLENT ISRAELI ECONOMIC
PERFORMANCE DESPITE WAR


Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d.

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

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 004269

SIPDIS

NEA/FO FOR DANIN; NEA/IPA FOR WILLIAMS, SHAMPAINE,
BELGRADE; EB/FO FOR DIBBLE; EB/OMA FOR GARRY; NSC FOR
ABRAMS, WATERS; TREASURY FOR HIRSON

E.O. 12958: DECL: 10/25/2016
TAGS: ECON EFIN PGOV PREL SCRM IS KPAL KWBG
SUBJECT: BOI GOVERNOR SEES EXCELLENT ISRAELI ECONOMIC
PERFORMANCE DESPITE WAR


Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d.

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


1. (C) Governor of the Bank of Israel (BOI) Stanley Fischer
told the Ambassador that Israel's economic situation is
excellent, despite the recent war, which slowed 2006 economic
growth by about one percent. Inflation is very low, and the
.25 percent interest rate decrease on October 23 was meant to
bring it up into the one to three percent target range. The
2006 deficit should be about 2.5 percent of GDP and growth is
forecast to be in the four percent range. Fischer said that
fiscal policy is tighter than it appears, given that the
Ministry of Finance (MOF) always understates revenues to help
keep expenditures under control, and added that the results
of the defense spending review currently underway will have a
great impact on budgeting decisions in the next few years.
He indicated that, as far as he knew, MOF DG Yossi Bachar was
leaving his post for purely personal reasons. On the
establishment of the new Economic Advisory Council (EAC) in
the Prime Minister's office, Fischer expressed great
enthusiasm and strongly praised its Director, Manuel
Trajtenberg. On the proposed BOI Law, Fischer expressed
great frustration at the impasse over the workers' wage
demands, and said that the MOF's unwillingness to help solve
the problem called into question the underlying assumption
that guided the formulation of the law that an atmosphere of
goodwill and cooperation would always prevail between the MOF
and the BOI. Regarding the Israeli-Palestinian correspondent
banking situation, Fischer said that a solution is at hand.
(Note: the agreement was approved on October 25 by the
Knesset Law and Justice Committee, but is still subject to
further deliberation. End Note). End Summary.

--------------

Overall Economic Picture Excellent
--------------


2. (C) In an October 24 meeting at the BOI, Fischer told the
Ambassador that the overall Israeli post-war macroeconomic
picture is surprisingly good. The war caused about a one
percent decline in annual GDP growth numbers with the worst
damage being in the third quarter when the Bank expects the
numbers to show a slight contraction in GDP. The post-war
recovery was very fast, with exports undamaged and domestic
consumption picking up quickly. While there was some
short-term contraction in industrial production in the
northern part of the country, it is the tourism sector that
will suffer longer-lasting damage. The housing sector was
not much affected by the war, but is recovering surprisingly
slowly from the deep recession earlier in the decade.

--------------
Defense Spending the Wild Card
--------------


3. (C) Fischer forecasted that the government will end the
year with a budget deficit of 2.5 percent of GDP. The
deficit is expected to increase next year, but it should
still come in under the three percent target. The big
unknown for next year will be the result of the defense
spending review. Fischer is surprised at how many people
think the MOD can get by with a smaller budget, even after
all of the post-war talk of the need to increase defense
spending. He is of the mind that &if you want more of
something, you generally need to pay more for it,8 but lots
of people who claim to be knowledgeable on defense issues
tell him that there,s a fair amount of waste and
inefficiency that can be cut.

--------------
Fiscal Policy Tighter Than it Appears
--------------


4. (C) Fischer thinks fiscal policy will turn out to be
tighter this year than the numbers seem to indicate right
now, since the &boys in the Treasury8 like to underestimate
revenues to help keep expenditures under control. He is
"amazed" at how much the targets (set in the 2003 U.S.-Israel
Loan Guarantee Agreement) do to help keep ministers,
spending demands in check. Although a lower deficit would be
desirable, the MOF is confident the debt-to-GDP ratio will
continue to fall next year due to revenues generated by the
continued privatization of government-owned industries, such
as the Haifa Oil Refineries company. The BOI forecast four
percent GDP growth in 2007, taking into account the
possibility of governmental instability. Noting, however,
that the coalition has been "bought relatively cheaply" and
did not bust the budget, Fischer added that the government
now appears to be relatively stable. Therefore, next year is
likely to be considerably better, barring a global recession
or a deterioration in the security situation.

--------------
Inflation Too Low
--------------


5. (C) Calling it "embarrassing," Fischer said that Israel
will end the year with inflation below the one to three
percent target range due to the currency,s appreciation and
falling oil prices. The Bank debated cutting the rate by
more than the .25 percent (down to 5.25 percent) announced on
October 23, but they decided against it because things can
change so quickly in Israel. Bigger cuts have been made in
the past, "but they have always failed."

--------------
Bachar Leaving MOF For Personal Reasons
--------------


6. (C) Responding to the Ambassador's query regarding the
impact of the departure of Ministry of Finance (MOF) Director
General Yossi Bachar, Fischer did not have much to say. He
noted only that Bachar,s job is &very wearying,8 and
thinks he is leaving simply because he is tired and wants to
move on to something else. He added that Bachar personally
told him that there is no truth whatsoever to the rumors and
press reports that he "doesn,t like Hirchson." Fischer then
stressed the need to "have someone good in that position" and
said that there are a lot of talented candidates.

--------------
Positive on New Economic Advisory Council
--------------


7. (C) When the Ambassador raised the issue of Olmert,s new
Economic Advisory Council (EAC),Fischer called it a "good
thing" and said that its chief, Manuel Trajtenberg, is a very
good pick -- a "great researcher" who was mentored by a good
friend of his. He said that the BOI will work well with the
EAC. Some of his BOI colleagues initially were worried that
the EAC would infringe on the Governor,s designation as the
"Economic Advisor to the Government," but since the BOI
doesn,t design its research program based on the Prime
Minister,s objectives, the PM needs his own economic advisor
to work on his priorities. If Olmert doesn,t have &his own
guys,8 the &boys at the Treasury8 will rule. As an
example, he said that MOF footdragging has prevented Olmert
from introducing a negative income tax, an idea he has
championed since his tenure as Finance Minister. The MOF
bureaucracy continually came up with reasons why it would be
a bad idea despite the minister's expressed desire to make it
happen.

--------------
BOI - MOF Relations At Low Point
--------------


8. (C) Regarding the status of the BOI law, Fischer said
that "nothing is happening with it now." The negotiations
are stuck on the issue of wage arrangements for BOI workers,
and will soon reach a crisis point. The MOF won,t move on a
wage agreement, and the workers won,t allow the law to
proceed without it. The problem is that the MOF does not
want to accept responsibility for a wage agreement that would
result in a large payout to retirees at a time of supposed
fiscal austerity. In the end, the retirees will receive some
of the money they had originally been promised, but the MOF's
fear of investigations by the press, the State Comptroller,
the Movement for Quality Government, etc. means that reaching
an agreement will require the intervention of the PM. The
MOF,s attitude towards this dispute is causing Fischer to
reevaluate some elements of the proposed BOI law, which are
based on a presumption of goodwill between the BOI and the
MOF. He no longer is sure if that can be counted on; &If
they want to pull my tail on the wages, they can,8 he said.
Regarding the recent State Comptroller investigation into
alleged wage improprieties (which involves some current
employees),he characterized it as &sheer harassment8 and
is sure the Comptroller will lose the case. On a positive
note, Fischer noted that GOI officials -- including those
from the MOF -- never exert any pressure on interest rate
decisions and he is given a free hand to control the Bank,s
policy decisions -- the "things that matter."

--------------
Israeli-Palestinian Banking Solution At Hand
--------------


9. (C) In response to the Ambassador's question on the
status of the Israeli-Palestinian correspondent banking
issue, Fischer said he thinks it has been resolved, but will
require some months to implement, even after Knesset
approval. (Note: The Knesset Law and Justice Committee
approved the agreement on October 25, but it is still subject
to further deliberations. End Note). The holdup was that
the anti-terror finance people in the Justice Ministry
originally wanted to require that every single check written
from a Palestinian bank be cleared against a watchlist, as
opposed to the requirement in the agreement that only checks
written for amounts greater than NIS 5000 be subjected to
such scrutiny. Implementing this demand would have doubled
the number of checks scrutinized from 880,000 per year to
about 1.9 million. Fischer called this "untenable" and said
the banks simply would not do it. He noted that he talks
frequently with George El-Abed, the Palestinian Monetary
Authority Governor, and that the Palestinians have been very
cooperative in already taking some tough measures to begin
implementing the agreement. He added that the banks (Israel
Discount Bank and Hapoalim) will threaten to cut off the
services fairly frequently, but that the GOI has given them
the assurances and procedures they need to keep clearing
checks. On the whole, IDB has been more cooperative than
Hapoalim, but Hapoalim always comes around in the end.
Fischer also said that the Israeli banks have asked him about
the U.S. attitude towards the situation. After speaking to
U.S. Treasury officials, he said that he was able to assure
the banks that the U.S. is unlikely to prosecute banks who
have make a good faith effort to thwart terror financing.
However, the USG could "obviously" not guarantee that a bank
would not be subject to laws that are on the books.

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