After Terror Attack Israel Economy Remains Strong

By Joel Leyden
Israel News Agency

Jerusalem---February 27....Just hours after Israel was shaken by an Islamic Arab terror attack in Tel Aviv, "The Economist" gave Israel a solid and stable ranking for it's economy. Israel scored 35 out of a possible 100 points for country risk, compared with 40 points in 2004.

Israel’s credit risk rating on overseas financial markets is greatly improving. The Economist Intelligence Unit (EIU) of British financial weekly “The Economist” put Israel in 9th place amount 27 emerging market in its country risk rating for 2005. The magazine gave Israel 35 out of a possible 100 points, compared with 40 points in 2004. The rating was published in the February 27th edition of “The Economist”. A higher point rating for a country means that a country has a higher credit risk for foreign investors; few points mean that a country is safer.

“The Economist’s” country risk rating weighs 77 political, diplomatic, security, and economic indicators, including inflation, interest rates, price stability, financial system stability, foreign currency activity, and balance of payments deficit. ”The Economist” said that Israel is safer for foreign investors than eighteen other countries, including Thailand, India, South Africa, China, Mexico, Russia, Brazil, Peru, and Egypt. Poland had 35 points, the same rating as Israel. Only seven emerging economies were rated as safer than Israel for foreign investors: Singapore, Hong Kong, Chile, Taiwan, South Korea, Malaysia, and the Czech Republic.

The riskiest countries for foreign investors were Iraq, Zimbabwe, Argentina, Venezuela, the Philippines, Indonesia, Turkey, Ukraine, and Columbia.

The Tel Aviv Stock Exchange (TASE) rose today. The Tel Aviv 25 index was up 0.45% at 637.80 points, the Tel Aviv 100 index rose 0.69% to 661.94 points, and the Tel-Tech 15 index rose 2.18% to 428.21 points. Turnover totaled NIS 613 million. Despite Friday’s terrorist attack, trading opened on moderate rises today, thanks mostly to a following wind from the positive trend at the end of last week’s Wall Street trading.

Venture capitalists, foreign investors, tourists and businessmen from all trades avoided from going to and investing in the Jewish state as Hamas, Hizbullah and Islamic Jihad were blowing up Israeli buses, restaurants and shopping centers. To make matters worse, the US State Department sent out travel warnings alerting businessmen of "problems" and "risks" they would face in coming to Israel. As such many businesspeople were denied travel insurance when planning to come to Israel. But Israel kept her chin high with the support of some outstanding businesspeople from Microsoft to Intel and celebrities such as Madonna and Christopher "Superman" Reeves coming to Israel and stating openly that "Israel was as safe as New York."
This editor who lives in both Israel and New York can qualify Madonna's advice with that it is safer in Jerusalem than on 47th Street.

The real turning point was the death of Yasser Arafat. Arafat, who was calling for peace in English while inciting Palestinians to Jihad (holy war) in Arabic stole millions of dollars in humanitarian aid from the US and the EU. Money which could have been used to build schools and hospitals, funds that could have provided badly needed capital to Palestinian businessmen vaporized into the bank accounts of Arafat and his wife Suha in France and Switzerland. As wounded as the Israeli economy became, the Palestinian economy which relies on Israel's suffered more. Hama's and Saddam Hussein's offer for the buying of terror suicide bombers at 300 dollars per bomber, started to overshadow the production of houmous. Palestinian families were selling their sons in a cannibalistic fashion to feed their families. Arafat's death and renewed, sincere calls for peace were once again a reality. For now, Israel, Jordan and Egypt with the aid of US intelligence are counting on a real peace to take hold. This new alliance now faces its final challenge, the removal of both the Syria and Iran governments for the stability of the Middle-East and the rest of the civilized world.

Three years ago, Stef Wertheimer, Chairman, Board of Directors of Israel's ISCAR, Ltd. spoke at a hearing of the United States House Committee on International Relations. He revealed a "Marshall Plan" for the rebuilding of the Middle East. An economic insight very well worth taking a second look at today.

In January 2005, Standard & Poor's Ratings Services raised its outlook for Israel from negative to stable and affirmed Israel's 'A-/A-1' foreign currency and 'A+/A-1' local currency ratings. According to S & P credit analyst David Cooling: "The revision of the outlook reflects the narrowing of the budget deficit in 2004, prospects for medium-term fiscal consolidation underpinned by the U.S. loan guarantee program, renewed economic growth, and a significant improvement in the balance of payments.

At the same time, geopolitical risks have also stabilized, following a reduction in the level of violence, and the prospect of a new Palestinian leadership to reinvigorate the stalled peace process." In February 2005, Fitch Ratings revised the outlook on Israel's long-term local currency rating from negative to stable. It also affirmed the long-term local currency rating at 'A', the long-term foreign currency rating at 'A-', outlook stable, and the short-term foreign currency rating at 'F1'. "The improved local currency rating outlook reflects a decline in Israel's public debt ratio in 2004 and better medium-term debt dynamics," said Richard Fox, Senior Director in Fitch's Sovereign team. "Demonstrable spending control and a political commitment to spending restraint and deficit limitation lead Fitch to conclude that the debt ratio has at least stabilized and will probably trend down in the medium-term, albeit gradually.

This marks a significant, if not decisive, turning point in Israel's public debt dynamics." Once a traditional economy based mainly on agriculture, light industry and labor-intensive production, Israel has matured into a knowledge-based economy with internationally competitive telecommunications, IT, electronics, and life sciences industries. As a result of its small size and limited natural resources, Israeli industry is export-driven and capitalizes on a highly skilled, educated and innovative workforce. In addition, Israel serves as a trade bridge to three continents with Free Trade Agreements with the US, the European Union, Canada, Mexico, EFTA nations, and many Eastern bloc countries.

These factors, as well as a highly developed infrastructure and investor-friendly business environment, are attracting foreign investors. Foreign investment increased dramatically in the 1990s with the growth of the high-tech industry. In 1992, total foreign investment in Israel was $537 million; in 2004, that figure was $5.3 billion. Israel also became a magnet for venture capital to invest in Israeli start-up companies. International high-tech firms have been eager to set up shop in Israel, attracted by the country's skilled workforce, R&D capabilities and government-sponsored incentive programs. US companies continue to establish offices and subsidiaries in Israel and to expand existing facilities. The Israeli economy in 2004 GDP increased by 4.2 percent in 2004 (following an increase of 1.3% in 2003 and a decrease of 0.7% in 2002) and business-sector product by 6 percent, against the backdrop of economic recovery worldwide and a certain easing of the security situation in the region.

This growth was accompanied by a rise in employment, mainly in the business sector, reflecting a moderate downward trend in unemployment, from a peak of 10.9 percent in the third quarter of 2003 to 10.2 percent in the third quarter of 2004, alongside a rise in the participation rate in the labor force and a rise in labor productivity. Israel unemployment figures are actually higher, reaching over 20 percent as many of those who were once counted in Israel's labor pool have expired their unemployment rights and are no longer counted.

Yes, the economy in Israel is recovering slowly but we must all remember the cutting reality for which we are at today. Our economy is at its lowest point since the rebirth of the Jewish nation in 1948. Israel has many more obstacles, both foreign (Syria, Iran and Saudi economic terrorism) and domestic (economic reforms and incentives for VC's) to face, but we will overcome those obstacles for we have no other choice.