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January 31, 2015 / 11 Shevat, 5775
 
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Is Time Working For/Against Israel?


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For the first time, Israel’s country default spread (2.48%) – which reflects the risk premium on government bonds – is similar to that of the US (2.38%).

The trend of Israel’s economy from 1948 until today has reaffirmed that time has been working for – and not against – Israel. Moreover, the ongoing war, terrorism, international pressure and boycotts, which have challenged Israel since its establishment in 1948, have been exposed – in retrospect – as bumps and hurdles on the road to unprecedented economic growth.

The sustained, impressive growth of Israel’s economy throughout the last thirty years – in defiance of endemic geopolitical and military adversity – is documented in an August, 2014 study by Dr. Adam Reuter, the CEO of Financial Immunities Consulting and the Chairman of Reuter-Maydan Investment House. For example, Israel’s GDP catapulted from $30bn in 1984 to $300bn in 2014; per capita GDP surged from $7,000 to $38,000; public debt to GDP ratio shrunk from 280% to 66%; the external public debt to GDP ratio contracted from 55% to 10%; the budget deficit to GDP ratio decreased from 17% to 3%; the defense budget reduced from 20% to 6%; annual inflation collapsed from 450% to 1%; the foreign exchange reserves swelled from $3bn to $89bn; export rose from $10bn to $90bn; high tech exports expanded from $1bn to $28bn; research and development expenditures to GDP ratio grew from 1.3% to 4.2%; the population of Israel grew from 4.1 million to 8.2 million; etc.. The growth from 1948 is even more impressive: a 2000% growth, from a $1.5bn, to a $300bn, GDP.

Assessing the impact of the Gaza War on Israel’s economy against the backdrop of the three previous wars – 2006 against Lebanon’s Hezbollah and 2009 and 2012 against Gaza’s Hamas – demonstrates an exceptional capability to bounce back rapidly, except for the gradual recovery of tourism, which accounts for 2% of Israel’s gross domestic product (GDP). The pattern of crisis-to-recovery has always featured an abrupt and short-lived crisis followed by a speedy – not a prolonged – recovery (a “V” and not a “U” shaped graph).

For example, according to the Bank of Israel, the 2006 war against Hezbollah triggered an immediate drop of GDP from more than 6% to a negative growth of 1.5%, followed by a swift recovery to almost 10% growth in the following quarter (prior to the global economic meltdown). The effects of the 2009 and 2012 wars were significantly more moderate, but recovery was as rapid.

The 2014 Gaza War is estimated to lower Israel’s 2014 GDP by 0.5%. Based on recent precedents, it will have insignificant influence on foreign investors, most of who seek the knowhow–intensive Israeli high tech companies, which are minimally vulnerable to rocket and missile fire. Moreover, the expanded global interest in Israeli-developed and manufactured, battle-tested defense systems (e.g., the “Iron Dome,” “Trophy,” “Aqua Shield,” “Point Shield,” etc.) – which demonstrated their unique capabilities during the Gaza War – is expected to bolster a quick recovery and the continued growth of Israel’s economy.

In 2014, Israel is the world’s top exporter of drones, the world’s co-leader (along with the US) in the development, manufacturing and launching of small and medium size satellites, the sixth largest exporter of military systems, the 2nd largest cyber exporter – $3bn in 2013, 5% of total exports and three times larger than Britain’s, as well as an emerging natural gas power.

The February, 2014 International Monetary Fund (IMF) Israel Country Report stated: “Israel has been exposed to a series of shocks, including the global crisis and heightened geopolitical tensions in the Middle East. Nevertheless, GDP growth has averaged 4% over the past 5 years, compared with 0.7% on average for OECD countries. Per capita GDP grows more rapidly than in other OECD countries.” The three leading credit rating companies, Standard & Poor’s, Moody’s and Fitch reaffirmed Israel’s high credit rating, emphasizing its fiscal responsibility, economic dynamism and resilience, while lowering the credit rating of many developed economies. According to the OECD annual 2013 report, Israel is the 4th most attractive country for foreign direct investment (FDI) per GDP – 4%, compared to 1.6% in the top 16 economies. Warren Buffett attests to that distinction: “Israel is the leading, largest and most promising investment hub outside the United States.” In addition, leading US venture capital funds established Israel-dedicated funds, and over 250 leading US high tech companies established research and development centers in Israel, leveraging Israel’s brainpower, which has become a chief pipeline of cutting edge technologies; thus, expanding US employment, research and development and exports. Intel’s recent decision to invest $6bn in upgrading one of its six Israeli facilities represents the confidence of the global high tech community in Israel’s long term viability.

About the Author: Ambassador (ret.) Yoram Ettinger is consultant to Israel’s Cabinet members and Israeli legislators, and lecturer in the U.S., Canada and Israel on Israel’s unique contributions to American interests, the foundations of U.S.-Israel relations, the Iranian threat, and Jewish-Arab issues.


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