Frenkel Appointment Welcomed as 'Surprising, but Positive'

Analysts say new Bank of Israel governor brings experience and continuity, but faces different challenges than during his 1990s term.

The capital market on Monday greeted the appointment of Jacob Frenkel as the next Bank of Israel governor with nearly wall-to-wall satisfaction, with some calling him a figure of sufficient renown and experience to easily fill the shoes of departing central bank head Stanley Fischer.

"We're talking about a surprising but positive decision for the Israeli economy," a statement from established Israeli financial services firm Halman-Aldubi said Monday morning. "The prime minister will continue the same line that has proven itself correct – of appointing someone to lead the central bank who is experienced and enjoys a certain aura and international experience."

Despite the praise, however, the markets were mostly down on Monday. The Tel Aviv Stock Exchange's benchmark TA-25 index was down 0.6% at midday while bond prices dropped sharply again. The government's 10-year shekel bond was off 0.56% to a yield of 3.95%. The dollar gained 0.1% on the shekel to NIS 3.65.

Traders said the market's behavior wasn't being influenced by the Frenkel appointment but by global trends. "I expect the bond and stock markets to respond to the appointment positively, but we need to remember that the bond market is being influenced these days more by yields on U.S. government bonds than by the appointment of an old-new governor," Shmuel Ben-Arieh, research director for the domestic market at Pioneer Financial Planning, said.

Frenkel, 70, was tapped late Sunday to take the reins from Fischer, who is stepping down next week after eight years as Bank of Israel governor. During his tenure, he guided Israel's economy through the most serious global financial crisis in decades.

Frenkel's start date on the job not announced, but he is currently serving as chairman of JPMorgan International, which implements the international strategy of the American financial services firm. He is unlikely to arrive in time to take over immediately from Fischer, meaning that Deputy Governor Karnit Flug, also a candidate for the top job, will likely be acting central bank chief for at least several weeks.

A different set of problems

The Halman-Aldubi statement said that, at a time when the global financial crisis is far from over, the Israeli economy will benefit from someone at the helm of the central bank who enjoys a reputation and an authority outside of Israel.

As Bank of Israel governor from 1991 to 2000, Frenkel was credited with reducing inflation, liberalizing financial markets and removing foreign exchange controls. Today, commentators said, he faces a very different set of problems.

At Halman-Aldubi, they said the biggest problem for the economy today is slowing growth. "Prof. Frenkel is best known as someone who battled inflation, even at the cost of growth," the statement said. "Right now, in his new term, he will be forced to act differently and to direct a more expansive policy, otherwise the economy is likely to go into a recession."

Eldad Tamir, CEO of the Tamir-Fishman Investment House, called Frenkel the "right choice by every measure. His authority is recognized by both the government and by the public and makes up for the finance minister's [Yair Lapid's] lack of experience. He will also be a powerful figure in international forums. He has went through some difficult tests with the Israeli economy and passed them. In short, bingo!"

Haim Cohen, CEO of Dun & Bradstreet Israel, called it an "excellent appointment. We're talking about a professional who has been acknowledged around the world, an Israel Prize winner, a senior banker of great experience who has coped in recent years with the challenges of exiting the global crisis."

Cohen added that Frenkel's appointment signals continuity and stability, which will help the Israeli economy cope with some difficult challenges: ensuring the stability of the banking system while creating a strategy for ensuring economic growth.

Bringing an 'American mentality' to Israel

Among the other issues the new governor faces, Cohen said, are coping with a regulatory system that divides responsibility for the capital markets with the Finance Ministry and Securities Authority. Frenkel will also have to address the problem of the strong shekel. "It will be interesting to see if he will continue with [Fischer's] aggressive liquidity strategy and the growth of foreign currency deposits."

Meanwhile, a statement from Alfa Platinum Mutual Funds said Frenkel brought U.S.-style monetary policy to Israel – an "American mentality" – with its emphasis on the bank of Israel's independence from the government in his first term.

That is what caused Benjamin Netanyahu, when he was finance minister in 2005, to seek a candidate from abroad like Fischer to take over in 2005.

"The markets these days are looking for continuity, and Frenkel is the right person at the right time," the Alfa Platinum statement said. Nevertheless, it warned that Netanyahu and Lapid could find themselves in the line of Frenkel's fire.

Alfa Platinum also said Frenkel is remembered as a governor who "stood up to prime ministers and wasn't afraid to express his views even when they opposed populist public opinion."

Yaniv Pagot of the Ayalon Group said the most significant challenge Frenkel faces will be helping the government to deflate the housing market and prevent any damage to the financial sector while doing it.

"The Bank of Israel under Fischer's leadership gave up trying to restrain the housing market and handed the hot potato to the government, which in the meantime is dragging its feet," he said.
 

Bloomberg