Identifier
Created
Classification
Origin
06TELAVIV714
2006-02-17 15:55:00
CONFIDENTIAL
Embassy Tel Aviv
Cable title:
FISCHER GOVERNS A STABLE ISRAELI ECONOMY
how-to read a cableThis record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 000714
SIPDIS
E.O. 12958: DECL: 02/15/2016
TAGS: ECON EFIN PGOV IS ECONOMY AND FINANCE GOI INTERNAL ISRAELI PALESTINIAN AFFAIRS
SUBJECT: FISCHER GOVERNS A STABLE ISRAELI ECONOMY
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 02 TEL AVIV 000714
SIPDIS
E.O. 12958: DECL: 02/15/2016
TAGS: ECON EFIN PGOV IS ECONOMY AND FINANCE GOI INTERNAL ISRAELI PALESTINIAN AFFAIRS
SUBJECT: FISCHER GOVERNS A STABLE ISRAELI ECONOMY
Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d.
--------------
Summary
--------------
1. (C) Bank of Israel (BOI) Governor Stanley Fischer told
the Ambassador that the Israeli economy is in good shape, and
that, contrary to statements by some politicians, the poverty
situation was actually improving. He said that the political
issue was really one of relative rather than absolute
poverty, but that however one defines it, the new government
formed after the elections would have to deal with it. He is
not particularly concerned about election promises regarding
the issue and was optimistic about the GOI's ability to deal
with the issue. He said that it was necessary to raise
interest rates to keep down inflationary expectations, and to
preemptively deal with potential crises that may arise during
the unstable period between the Hamas victory and the Israeli
elections. Regarding the Palestinians, Fischer said that the
Palestinian economy was too small to affect Israel's economic
well-being, but that the Palestinians would be severely
impacted by an economic downturn in Israel. End Summary.
--------------
Palestinians Dependent on Israeli Economy
--------------
2. (C) A relaxed and confident BOI Governor Stanley Fischer
spoke to the Ambassador, DCM, and Economic Counselor in his
office at the BOI on February 13 about the economy, the role
of the bank, bank reform, and poverty. He was satisfied that
the Israeli financial markets displayed resilience in the
wake of the PM's illness and the Hamas election victory,
noting that Hamas represented not an economic problem, but a
political one. He said that the USD ten billion Palestinian
economy had very little impact on Israel's USD 125 billion
economy, and likened the relationship between the two to that
between the U.S. and Mexico. He said that the Palestinians
were negatively impacted by the reduction in opportunities to
work in Israel, and that it is unrealistic to think that
Palestinian interactions with the USD 25 billion Jordanian
economy and the relatively distant Egyptian economy would be
able to take up the slack. He added that the Palestinians
would face even more severe problems if the Israeli economy
slipped into recession and further limited the number of
Palestinians who can work in the country. Fischer said that
he favored the transfer of PA customs revenue collected by
Israel to the Palestinians, but would not predict further GOI
actions on the issue.
--------------
Interest Rate Hikes
--------------
3. (C) In response to the Ambassador's question about recent
interest rate increases, Fischer cited the close link between
the interest rate and the exchange rate, explaining that a
rise in the shekel/dollar exchange rate - as has recently
been happening in Israel - has a direct impact on inflation.
Moreover, a gap between U.S. and Israeli interest rates would
cause an outflow of needed capital from Israel. He also
cited the need to deal with the political uncertainty brought
on by the Hamas victory and the Israeli election campaign.
Hiking rates now would help keep the financial system stable
in the event of a crisis occurring between the period of the
Hamas victory and the Israeli elections, and prevent future
accusations that not enough had been done to prevent the
crisis. He also complimented Ministry of Finance (MOF)
handling of the economy, saying that their "reasonable"
approach has been responsible for the economy's stability
and ability to take shocks in stride. However, he later
criticized the MOF for impinging on the BOI's independence by
its attempts to control the salaries of the Bank's employees.
Fischer added that there will likely be another rate hike
shortly, but said that although the decision is fundamentally
his alone to make, on two occasions his staff's presentations
persuaded him to decide things differently than he had
originally anticipated. As an aside, he noted that, as in
the U.S., Israel's current inverted yield curve - where long
term rates remain stable while short term rates rise - could
be a harbinger of recession and should be watched.
4. (C) In response to another question, Fischer said that,
although large, Israel's debt situation is not worrying.
Most maturities are for seven years or longer and there is
currently no danger of a liquidity problem. Only the fact
that rating agencies pay close attention to it makes it a
concern. Nonetheless, he acknowledged that interest on the
debt represents the second largest budget expenditure, after
defense. He said that tourism has been strong for the past
two years and has contributed to the economic recovery. He
also noted that foreign capital investment in the same period
has been at least as important a factor in the recovery.
--------------
Poverty Situation Improving
--------------
5. (C) Regarding poverty, which has become a major campaign
issue, Fischer said that it has been improving, and that the
issue is not poverty per se, but rather the growing social
gap between the haves and the have-nots. He said that
poverty in Israel today was actually at the same level as in
1997 - that it had been declining until the intifada and then
rose again with the onset of the recession. He also said
that income statistics are incomplete and present a more
negative picture than actually exists. For example, they do
not take into account the black economy and are adjusted for
rents, which understates income for those who own their own
homes, as is predominantly the case in the Arab sector. He
added that the numbers used are pre-tax and do not count
transfer payments, which are large relative to other
countries and actually quite progressive. Fischer also noted
a positive trend developing in the Haredi community, which is
generally poor, but where more people have been tending to
join the formal work force.
--------------
Unconcerned about Election Promises
--------------
6. (C) Fischer said that he is not particularly troubled by
the welfare programs proposed by the Labor and Likud parties
as part of their election campaigns and is optimistic about
the GOI's plans to deal with the poverty issue, even though
it so politically difficult. He said that the NIS fourteen
billion the GOI approved for spending over the next seven
years to fight poverty during PM Sharon's last Cabinet
meeting can easily be financed within the one percent cap on
spending and the three percent budget deficit cap (note: as
required by the terms of the Loan Guarantee Agreement. End
Note). He added, however, that he did not think that caps
are a good idea, since they will limit the flexibility of
fiscal decision making as the economy grows.
--------------
Comment
--------------
7. (C) Since Fischer's appointment as Governor of the BOI
nine months ago, the Israeli markets have had to withstand
several severe shocks, including the resignation of FM
Netanyahu, the disengagement from Gaza, the illnesses of PM
Sharon, and the Hamas election victory. In each case, there
was a slightly negative market reaction to the event, but
things quickly returned to normal. This was in no small part
due to the experienced, highly respected, and reassuring
presence of Fischer at the helm of the BOI. Beginning last
summer, when the economic and financial leadership of the
country first entered into a state of flux, Fischer has
consistently stepped in to assume the economic leadership
role, and acted to keep the markets calm and stable. In
public fora, he has been very forward leaning in his policy
prescriptions, pushing especially strongly for continued
reform of the financial and banking system to allow for
smoother integration with the global financial community.
Until the next permanent Finance Minister is named upon
formation of a government later this year, Fischer will
continue to be Israel's de facto economic leader. End
Comment
********************************************* ********************
Visit Embassy Tel Aviv's Classified Website:
http://www.state.sgov.gov/p/nea/telaviv
You can also access this site through the State Department's
Classified SIPRNET website.
********************************************* ********************
JONES
SIPDIS
E.O. 12958: DECL: 02/15/2016
TAGS: ECON EFIN PGOV IS ECONOMY AND FINANCE GOI INTERNAL ISRAELI PALESTINIAN AFFAIRS
SUBJECT: FISCHER GOVERNS A STABLE ISRAELI ECONOMY
Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d.
--------------
Summary
--------------
1. (C) Bank of Israel (BOI) Governor Stanley Fischer told
the Ambassador that the Israeli economy is in good shape, and
that, contrary to statements by some politicians, the poverty
situation was actually improving. He said that the political
issue was really one of relative rather than absolute
poverty, but that however one defines it, the new government
formed after the elections would have to deal with it. He is
not particularly concerned about election promises regarding
the issue and was optimistic about the GOI's ability to deal
with the issue. He said that it was necessary to raise
interest rates to keep down inflationary expectations, and to
preemptively deal with potential crises that may arise during
the unstable period between the Hamas victory and the Israeli
elections. Regarding the Palestinians, Fischer said that the
Palestinian economy was too small to affect Israel's economic
well-being, but that the Palestinians would be severely
impacted by an economic downturn in Israel. End Summary.
--------------
Palestinians Dependent on Israeli Economy
--------------
2. (C) A relaxed and confident BOI Governor Stanley Fischer
spoke to the Ambassador, DCM, and Economic Counselor in his
office at the BOI on February 13 about the economy, the role
of the bank, bank reform, and poverty. He was satisfied that
the Israeli financial markets displayed resilience in the
wake of the PM's illness and the Hamas election victory,
noting that Hamas represented not an economic problem, but a
political one. He said that the USD ten billion Palestinian
economy had very little impact on Israel's USD 125 billion
economy, and likened the relationship between the two to that
between the U.S. and Mexico. He said that the Palestinians
were negatively impacted by the reduction in opportunities to
work in Israel, and that it is unrealistic to think that
Palestinian interactions with the USD 25 billion Jordanian
economy and the relatively distant Egyptian economy would be
able to take up the slack. He added that the Palestinians
would face even more severe problems if the Israeli economy
slipped into recession and further limited the number of
Palestinians who can work in the country. Fischer said that
he favored the transfer of PA customs revenue collected by
Israel to the Palestinians, but would not predict further GOI
actions on the issue.
--------------
Interest Rate Hikes
--------------
3. (C) In response to the Ambassador's question about recent
interest rate increases, Fischer cited the close link between
the interest rate and the exchange rate, explaining that a
rise in the shekel/dollar exchange rate - as has recently
been happening in Israel - has a direct impact on inflation.
Moreover, a gap between U.S. and Israeli interest rates would
cause an outflow of needed capital from Israel. He also
cited the need to deal with the political uncertainty brought
on by the Hamas victory and the Israeli election campaign.
Hiking rates now would help keep the financial system stable
in the event of a crisis occurring between the period of the
Hamas victory and the Israeli elections, and prevent future
accusations that not enough had been done to prevent the
crisis. He also complimented Ministry of Finance (MOF)
handling of the economy, saying that their "reasonable"
approach has been responsible for the economy's stability
and ability to take shocks in stride. However, he later
criticized the MOF for impinging on the BOI's independence by
its attempts to control the salaries of the Bank's employees.
Fischer added that there will likely be another rate hike
shortly, but said that although the decision is fundamentally
his alone to make, on two occasions his staff's presentations
persuaded him to decide things differently than he had
originally anticipated. As an aside, he noted that, as in
the U.S., Israel's current inverted yield curve - where long
term rates remain stable while short term rates rise - could
be a harbinger of recession and should be watched.
4. (C) In response to another question, Fischer said that,
although large, Israel's debt situation is not worrying.
Most maturities are for seven years or longer and there is
currently no danger of a liquidity problem. Only the fact
that rating agencies pay close attention to it makes it a
concern. Nonetheless, he acknowledged that interest on the
debt represents the second largest budget expenditure, after
defense. He said that tourism has been strong for the past
two years and has contributed to the economic recovery. He
also noted that foreign capital investment in the same period
has been at least as important a factor in the recovery.
--------------
Poverty Situation Improving
--------------
5. (C) Regarding poverty, which has become a major campaign
issue, Fischer said that it has been improving, and that the
issue is not poverty per se, but rather the growing social
gap between the haves and the have-nots. He said that
poverty in Israel today was actually at the same level as in
1997 - that it had been declining until the intifada and then
rose again with the onset of the recession. He also said
that income statistics are incomplete and present a more
negative picture than actually exists. For example, they do
not take into account the black economy and are adjusted for
rents, which understates income for those who own their own
homes, as is predominantly the case in the Arab sector. He
added that the numbers used are pre-tax and do not count
transfer payments, which are large relative to other
countries and actually quite progressive. Fischer also noted
a positive trend developing in the Haredi community, which is
generally poor, but where more people have been tending to
join the formal work force.
--------------
Unconcerned about Election Promises
--------------
6. (C) Fischer said that he is not particularly troubled by
the welfare programs proposed by the Labor and Likud parties
as part of their election campaigns and is optimistic about
the GOI's plans to deal with the poverty issue, even though
it so politically difficult. He said that the NIS fourteen
billion the GOI approved for spending over the next seven
years to fight poverty during PM Sharon's last Cabinet
meeting can easily be financed within the one percent cap on
spending and the three percent budget deficit cap (note: as
required by the terms of the Loan Guarantee Agreement. End
Note). He added, however, that he did not think that caps
are a good idea, since they will limit the flexibility of
fiscal decision making as the economy grows.
--------------
Comment
--------------
7. (C) Since Fischer's appointment as Governor of the BOI
nine months ago, the Israeli markets have had to withstand
several severe shocks, including the resignation of FM
Netanyahu, the disengagement from Gaza, the illnesses of PM
Sharon, and the Hamas election victory. In each case, there
was a slightly negative market reaction to the event, but
things quickly returned to normal. This was in no small part
due to the experienced, highly respected, and reassuring
presence of Fischer at the helm of the BOI. Beginning last
summer, when the economic and financial leadership of the
country first entered into a state of flux, Fischer has
consistently stepped in to assume the economic leadership
role, and acted to keep the markets calm and stable. In
public fora, he has been very forward leaning in his policy
prescriptions, pushing especially strongly for continued
reform of the financial and banking system to allow for
smoother integration with the global financial community.
Until the next permanent Finance Minister is named upon
formation of a government later this year, Fischer will
continue to be Israel's de facto economic leader. End
Comment
********************************************* ********************
Visit Embassy Tel Aviv's Classified Website:
http://www.state.sgov.gov/p/nea/telaviv
You can also access this site through the State Department's
Classified SIPRNET website.
********************************************* ********************
JONES