Central Bank Chief: ‘Biggest Price of Three Elections Is the Decisions Being Postponed’

'At a time when the business cycle is healthy, at a time when the economy is running smoothly, and the labor market is tight, we’re not advancing,' says Amir Yaron

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Bank of Israel governor Amir Yaron in his Tel Aviv office, January 27, 2020.
Bank of Israel governor Amir Yaron in his Tel Aviv office, January 27, 2020.Credit: Eyal Toueg

When Amir Yaron was appointed governor of the Bank of Israel 13 months ago, plenty of people wondered how the professor from the University of Pennsylvania, returning to Israel after a 25-year career in the United States, would handle Israel’s dramatic political scene.

No one imagined that that question would still be open today, more than a year later, as Israel heads toward its third election. The political uncertainty hasn’t halted Israel’s economy, which has been expanding for 30 quarters straight.

And yet, Yaron is concerned.

“The price of a string of elections is very significant,” he stated in an interview with TheMarker. “The biggest price of three elections isn’t the direct cost of holding them, or even the cost of a day off work for each election, but rather that necessary actions and decisions are being postponed, and at a time when the business cycle is healthy. At a time when the economy is running smoothly, and the labor market is tight, we’re not advancing – such as in investment in infrastructure and human capital, or regarding regulation.

“I hope that once we have a government, it can start addressing these fields,” he stated.

Despite the political deadlock, Yaron is performing his job as an economic advisor to the government. He notes that while there were meetings about the state budget, no concrete decisions have been made due to the political uncertainty.

Israel’s capital markets are roaring ahead despite it all. The blue-chip Tel Aviv 35 Index increased 15% last year, and the shekel gained 8% against a basket of currencies, and the unemployment rate is less than 4%. Meanwhile, apartment prices are rising.

Yaron explains it all by saying that the market has faith in Israel.

“The markets are reflecting the positive picture of the economy and the labor market. There’s no question that the markets believe that once there’s a government, it’ll address the budget gap. The more elections we have, the more doubts will arise concerning this, but at the moment, the market is giving us credit.”

One of the reasons for this is that Israel has reduced its debt-to-GDP ratio to about 60%, down from 100% several years back.

“We’re all hoping that we won’t get to the point where the market changes its mind about us,” he says.

Is it not overly optimistic to expect the next government to close the deficit?

“What’s important is that the government shows conviction” about meeting the deficit target, he says.

It’s less important to make sure the deficit is 2.5% immediately, and more important to hit the target in the medium term, within the next two and a half years, he says, commenting on Prime Minister Benjamin Netanyahu’s stated plan for a deficit of up to 3.3%, a level that the Bank of Israel predicts will cause the debt-to-GDP ratio to rise again.

If this happens, and the business cycle is still in a good place, Israel will have the fiscal wiggle room to carry out long-term projects and infrastructure investments, he says.

In the meanwhile, he calls on the government to continue investing in projects that could improve economic growth, such as the light rail system for the greater Tel Aviv region.

When asked whether the government can permit itself to cut spending in the civilian sector in order to fund increased military spending, Yaron is less vehement in his opposition than his predecessor, Karnit Flug. Closing the budget gap “first requires finding places where you can increase efficiency without increasing expenses,” he notes. “The education budget, for instance, was increased over the past decade, and yet we haven’t seen an improvement in results.” The solution involves reforms the central bank called for in its report on efficiency, including hiring better teachers and compensating them based on students’ performance, and encouraging teachers to work in disadvantaged areas, he says, among other measures.

“Some reform is needed before more money is put into the education system,” he says.

Israel has lots of people with academic degrees, but their skill level is poor.

“That’s an anomaly,” says Yaron. “Everyone here has a degree, and yet the test results aren’t impressive,” he says, noting that this applies both to tests of adults’ skills and to high schoolers who take the OECD’s PISA standardized test.

The central bank recommends improving schooling from an early age, such as preschool, which of course requires budgets, he says.

Unlike many of Israel’s former central bank governors, Yaron did not enter the job with years of experience at the Bank of Israel or at another financial institution.

“My resume is very broad when it comes to academia, but work at the Bank of Israel is something else,” he notes. “Some of the things I knew how to do, and others I needed to learn on the job.”

He devoted his first year, which he described as “super interesting” to building a new strategic plan for the Bank of Israel that is supposed to be the basis for working plans for years to come. The plan, which is slated to be published soon, has as one of its main goals making payment systems work faster in Israel, which lags behind other countries in this area. This would mean that people and businesses in Israel would be able to carry out payments that are cleared in a moment, around the clock, from bank account to bank account without the use of a credit card.

Faster payments would also mean reduced costs, as cost clearing would be cheaper, he notes.

Yaron is also trying to advance an open banking project, which would let consumers show their banking data to third parties such as competing banks or other service providers, which could thus offer them financial services. The project is dependent on bridging arguments between Israel’s various financial regulators, and on new legislation.

An open banking system could change the financial sector, says Yaron. “Open banking will enable consumers to face various bodies that would need to compete for them and could change the financial system,” he says. “They’d give the consumer – with his consent – information, insights, analyses and proposals, and maybe even let him make payments. He could make better decisions in terms of both his needs and costs.”

The central bank has also changed regarding its outlook on competition in the banking sector, Yaron says. In the past, the central bank had objected to increasing competition, or to significant cuts in costs of services. No more, says Yaron.

“There’s been a change at the Bank of Israel,” he says. “We’re seeing bank stability in a more dynamic way. We’ve been advancing many changes,” he says, including launching a database on consumer credit and removing obstacles to new banks entering the market. “We’re guiding the foundation of a digital bank, and we’re hoping others enter the market,” he says.

TheMarker also asked Yaron about the central bank’s decision to return to buying dollars, in an attempt to keep the shekel from appreciating too much. Initially it had seemed that Yaron intended to wean the bank off the practice, which had swelled Israel’s foreign currency reserves to more than 30% of GDP. But less than a year later, in March, the bank returned to buying dollars, and sopped up $3.8 billion last year.

Yaron claims he never changed his policy in this regard. “I have a clear preference that the foreign currency market operate on its own, so long as the exchange rate is within a window that enables price stability and proper economic functioning,” he says. “The moment it leaves this window, we take action as need be.”

He noted that the bank’s target exchange rate is dynamic.

“We have our models, and we’re independent,” he says. That said, the shekel was the currency that gained the most against the dollar in 2019, with the exception of the ruble. In addition, the U.S. exchange rate is nearly 2%, while Israel’s is 0.25%, which reduces the cost of the central bank’s foreign currency operations, he notes.

Asked whether he thinks the central bank can beat the market, he says, “We know what we’re doing. … I don’t think it’s a matter of winning or losing.”