To help bail out exporters stung by the appreciating shekel, Israel should securitize the profits from its natural gas royalties to buy dollars, Bank Leumi Chief Economist Gil Bufman said during a recent visit by an IMF delegation. This would be done through special bond issues.
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Israel’s sovereign wealth fund from natural gas royalty payments will only begin operating in 2018. In the meantime, Israel should securitize the fund’s future revenues to buy dollars today and offset capital flows into the country, Bufman told TheMarker in an interview.
According to Bufman, exporters will be seriously threatened if Israel does not implement a long-term policy to halt the shekel’s appreciation. The Bank of Israel’s current dollar-buying program is a short-term solution that does not solve the problem of capital flowing into the economy faster than it leaves, he says.
In the near term, Israel should issue shekel-denominated bonds to build up the capital held in the sovereign wealth fund and use the money raised to buy assets denominated in foreign currencies, Bufman adds.
“To effectively deal with the appreciation of the shekel, one can assume that the size of annual investments the fund makes abroad must be similar to the size of direct capital flows entering Israel [about 10 billion shekels ($2.85 billion) per year],” he says.
“In other words, it would be the securitization of future tax receipts from natural gas production and the hedged use of the bonds’ proceeds to establish the sovereign wealth fund.” In no way should the money be used to fund the state budget deficit, Bufman says.
To make the bonds more attractive to investors and make clear that they do not constitute an expansion of the national debt to fund the budget deficit, Bufman proposes creating a new bond series to be used solely for the sovereign wealth fund.
He admits that such bond issues would increase Israel’s debt-to-GDP ratio, but if they were used to maintain a stable shekel they would encourage growth in the Israeli economy and labor market, justifying a limited and temporary expansion of the debt-to-GDP ratio. Moreover, as tax receipts from natural-resource royalty payments increased, the bonds would be redeemed and the debt-to-GDP ratio would shrink.
“It’s desirable that the term to maturity for these new bonds be long,” Bufman says.” This would match them to the state’s revenue flow from tax returns, which would create a clear link between the expected timing of the tax receipts and the planned principal and interest payments for the bonds.”
He adds that this long term to maturity would make the bonds attractive to pension funds, which seek long-term government bonds with fixed interest rates. Bufman says it would even be preferable to make the bonds non-tradeable to reduce their exposure to short-term market volatility.
Bufman will present his plan in greater detail at the Bank of Israel’s forecasters’ forum on December 26, where Bank of Israel Governor Karnit Flug will be in attendance. Copies have already gone to the central bank and the Finance Ministry.