Stanley Fischer: Impact of the global financial crisis on Israel's economy
Address by Professor Stanley Fischer, Governor of the Bank of Israel, to the General
Assembly of the Association of Publicly Traded Companies, Jerusalem, 8 December 2008.
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For more than a year the world has been confronting one of the worst financial crises in over
seventy years. This crisis has two phases: the first, financial, and the second, real, in other
words a significant slowdown, and possibly even a global recession.
Both the financial and real effects of the global financial crisis on Israel's economy are clearly
evident. I would like to stress, however, that Israel entered this period in a more favorable
state than that in most other countries.
On the financial side the crisis is reflected in Israel mainly by the fall in prices of shares and
corporate bonds, unlike in the advanced and other economies. In addition, the rate of growth
declined to 2.3 percent (annual rate) in the third quarter, and it is expected that the slowdown
in Israel's growth rate will continue, i.e., growth will remain positive, but will slow further, (to
1.5 percent in 2009), as opposed to a more significant slowdown, or even a recession, in the
advanced economies.
Israel's relatively favorable situation is due to several factors:
1) The government's fiscal policy in the last few years was a responsible one.
2) The Bank of Israel's interest rate policy supported financial stability and the ability of
the economy to deal successfully with the effects of the slowdown in growth. This,
without acting counter to the return of inflation to within the target range.
3) A surplus has been created in the current account of the balance of payments.
4) Israel's foreign exchange reserves are high and rising, as a result of the Bank of
Israel's plan to increase them.
5) The levels of growth and employment were high at the onset of the crisis.
6) Israel's banking system is strong and stable compared with those of the advanced
economies.
7) Israel's capital market did not develop advanced, complex financial instruments
whose inherent risk levels are difficult to assess.
8) The average debt burden of companies and households is relatively low.
The challenge at present is to preserve the economy's relatively favorable position, to take
advantage of it to deal with the new situation, and to introduce the measures needed to
escape from the period of slowdown without harming the economy's ability to return to the
path of rapid and sustained growth. All this, despite the forthcoming elections and the fact
that the 2009 budget has not been approved yet.
At this stage the Bank of Israel, in the framework of its powers and the instruments available,
is taking the following steps:
1) It is conducting an active interest rate policy intended to strengthen the economy's
ability to handle the crisis.
2) The Bank Supervision Department has intensified its regular monitoring of
developments in the banking system. In addition, the Bank announced that it was
ready to help the banks with all the means at its disposal, as necessary, in order to
support depositors.
3) The Bank's program to buy foreign currency will continue until the forex reserves
reach the level considered appropriate under the current circumstances - between
$40 billion and $44 billion.
What do we still have to do?
1) A cautious fiscal policy should be pursued. Thus, assuming a growth rate of 1.5
percent in 2009, the budget deficit is expected to reach about 3 percent of GDP,
based on the automatic stabilizers, i.e., the expected drop in tax revenues resulting
from the slowdown in growth, on the one hand, and a certain rise in government
expenditure arising, for example, from an increase in unemployment, on the other. It
would not be advisable to allow the deficit to rise much beyond that; in other words,
our ability to embark on an expansionary fiscal policy is limited.
Nevertheless, the tax cuts planned for 2009 should proceed, in a manner consistent with the
automatic stabilizers.
2) The measures formulated by the Ministry of Finance in cooperation with the
Securities Authority and the Bank of Israel should be implemented. This program
should help the economy weather the storm.
3) It is essential, and I would place the emphasis on this aspect, to introduce measures
on the financial side, particularly steps intended to increase the sources of bank and
nonbank credit for the business sector, including small and medium-sized
businesses, and to stimulate foreign investment in Israel's capital market.
Yesterday the Prime Minister decided to support the proposal put forward by the work teams
of the Ministry of Finance, the Bank of Israel and the Prime Minister's Office, regarding a
"safety net" for savers close to retirement age. The Bank is in favor of the proposal and its
immediate implementation.
However, we view the safety net as a temporary measure for this particular time. It is
important to start thinking about changes to the structure of the pensions system in Israel, to
ensure that those paying into funded pension schemes, as opposed to those covered by
unfunded schemes, are not placed in a situation in which, close to retirement age, they are
likely to lose a significant part of their savings. It is important that the pension system be
structured such that when the time arrives savers can receive a reasonable pension for the
rest of their lives. One possible pension scheme structure that could be adopted is the
Sicilian model, in which the savings of those close to retirement age are transferred to
relatively low-risk channels.
To my great regret, the other steps formulated by the Ministry of Finance, although approved
by the Prime Minister, are making little or no progress vis-à-vis the Knesset, and are not
being implemented. Thus, valuable time that could be used to the benefit of the economy is
being wasted, particularly regarding measures relating to the financial side. Further delay in
applying these measures is likely to erode the economic achievements of the last few years
and our ability successfully to meet the challenges facing us.
This is not the time, therefore, to postpone decision making. The financial crisis is here, and
is not waiting for us. The measures have been planned, and all that remains is to start with
the none-too-simple task of making decisions and implementing them. It is essential that at
this time, in the approach to the elections to the Knesset, we persist in being focused, and
act with a view to the medium and long term. Failure to do so will cost us dear.