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One has to compare the events of the fall of 2000 and the summer of 2006, both of which were characterized by a sudden transition from bubbly euphoria and diplomatic optimism, to the dreary reality of the Middle East.

After three years of economic advance, investors local and foreign received a sharp reminder of Israel's special risk premium.

In the days to come, we will find out whether Israel's future is to sink back into the Lebanese quagmire, which will require everybody to revisit their upbeat forecasts. But for the nonce, however grave the military crisis - we can look at the true strength of Israel's economy, created in the last few years.

*The government ran a surplus of NIS 4.7 billion in the first half of 2006. Before the sudden eruption in the north, tax revenues and government spending were expected to be balanced this year. Even if tax collection forecasts for the second half are adjusted because of the situation, the government could re-adjust its budget priorities and not increase the scope of its spending. A low deficit is critical in the view of foreign investors: and it would help the government and Bank of Israel keep interest rates low.

*For three years, inflation has stayed within the range of 2% to 3%, about the level in the west. In the last year Bank of Israel governor Stanley Fischer has become bogged down in the mud of corruption at the central bank, but at times of national crisis, his international renown is critical to maintaining the confidence of foreign investors in Israel's ability to preserve financial stability.

If the markets continue to show faith in Israel's economic policy, the government can keep Israeli interest rates close to international prices of capital. The last time around, investors had lost confidence in Israel's economy - and short- and long-term interest rates ran double the western levels.

*Foreign investors have become leery of emerging markets. But despite Israel's unhappy security situation, it has a stronger, more stable financial profile than ever before. Israel's balance of payments was positive in the first half of 2006, while most of the emerging markets have major deficits. Israel's balance of foreign assets and liabilities is positive and it's also sheltered by the U.S. umbrella of loan guarantees.

*The former security crisis threatened the stability of the banks, which had been the only real source of credit. But in the last two years, Israel's financial scene has changed beyond recognition. Most of the big companies raise capital from places other than the banks, such as bond offerings on the Tel Aviv Stock Exchange. The banks are far less exposed to problems in the business sector.

*Most investment bodies have been diversifying their portfolios with foreign assets. The big holding companies, real estate companies and provident and mutual funds almost all have 10% to 30% of assets in foreign avenues, which greatly reduces the risk of their portfolio compared with the past.

in short, Israel's financial profile is stronger than ever, at the levels of government and private sector alike. But the long-term damage of the events unfolding now could be very great indeed.

Not a missile but the talk about it

I don't mean the injury to tourism or temporary hiatus in foreign investment. I mean that the military agenda could re-conquer the public debate in Israel.

The military agenda is what enables the defense establishment to squander billions on bloated workforces, superfluous procurement and gargantuan mechanisms. In the fog of war, Israel's politicians tend to the short-range and irresponsible in economic policy.

We have been reading about rampant corruption and tailor-made tenders dating from 2001 and 2002, the years in which the intifada raged hardest. Stories about midnight meetings between politicians and Israel Railways personalities with suppliers are a sharp reminder that Economic Enemy No. 1 is not the threat to our security, but bad, short-sighted economic management, and the spread of corruption in the government echelon.

The great test of the Israeli government is not only how it contends with the goading of Hezbollah and Nasrallah, but its ability to maintain sane economic policy even when security is in the headlines again.

Buffett's timing

As the rockets rain onto Israel, it's hard not to think of the astonishing timing at which Warren Buffett bought 80% of Iscar, situated in Tefen, northern Israel, for $4 billion. The deal was declared two months ago but only completed last week.

On Thursday afternoon I called Eitan Wertheimer to ask how his new partner feels, with  every TV station in the world announcing war the same week the gigantic deal closed.

Wertheimer said it's business as usual at Iscar and that Buffett hasn't been in touch asking what's happening in Israel. He confirms that payment for Iscar has been made and added that Buffett invested in Iscar because of its financial results, "and as far as that's concerned, there's no reason for change."

Would Buffett have completed the Iscar deal if the northern border had erupted a month before? Wertheimer has no doubt about it.  "We've been through times like this and worse, and reached achievements that led to Buffett's investment in Iscar," he says. "We are working as usual."