Israeli Government Fund to Direct Investment Toward Latin America

New undertaking with Inter-American Development Bank will raise $250 million from Israeli institutions

Prime Minister Benjamin Netanyahu shakes hands with Brazilian President Jair Bolsonaro, Rio de Janeiro, December 28, 2018.
Leo Correa,AP

It’s no secret that in recent years Israel has been trying to increase its influence in Latin America. Prime Minister Benjamin Netanyahu visited Brazil in January and before that made trips to Argentina, Colombia and Mexico as part of a strategy of diversifying Israel’s trade and diplomatic relations away from Western Europe and the United States.

Now, part of Israel’s Latin American drive is to invest Israeli capital — the retirement savings of millions of Israelis, deposited with institutional investors — in regional infrastructure projects in partnership with the Inter-American Development Bank.

The government recently published a call for bids to manage the fund, which is expected to raise $250 million from Israeli institutions. The criterion for prospective fund managers is at least two years’ experience managing a portfolio of at least $75 million.

Last summer, Netanyahu set up an interministerial committee “to realize the potential of international development to strengthen the Israeli economy, improve Israel’s political standing and strengthen its international role.”

One of the proposals was the establishment of an Israeli development bank similar to those in Scandinavian countries and the Netherlands. However, in the end it was decided to join an existing development bank, a solution better suited to Israel’s size.

“Up to now, Israeli institutions have invested in Israel and the West — the United States and Europe,” explained a source close to the new undertaking.

“Development banks are a way to help advance the Israel’s interests and agenda in the developing world, including Latin America. But it’s not philanthropy,” the source said.

In fact, Israel belongs to four global development banks — government-owned institutions that focus on proving capital to developing economies. In addition to the IDB, which Israel joined in 1976 and in which it has a 0.158% stake, it belongs to the World Bank, the European Bank for Reconstruction and Development and the Beijing-backed Asian Infrastructure Investment Bank.

The fund, plans for which are being led by Finance Ministry chief economist Yoel Naveh, will have a 15-year life span, It will invest in areas where Israel has a comparative advantage: technology, cybersecurity, agriculture, health and water.

Each dollar the fund lends for projects will be matched one-for-one by the IDB, meaning it will have the ability to make $500 million in loans. The Israeli institutions investing in the fund can expected to earn returns of about four percentage points over the London interbank offered rate, which today comes to 5.5% annually.

“The idea behind the model is to create a long-term investment channel to Latin America, with an attractive yield and relatively low risk — all through a preferred lender that recognizes the complexity involved in investing in such markets, but also works to help and bring prosperity to the region,” said the source close to the treasury plan.

Despite Latin America’s volatile economic history, including crises in Brazil and Argentina, losses from IDB lending have never exceeded 2%. Nevertheless, to encourage institutions that have little familiarity with Latin America, the government will be offering a safety net equal to 10% of the fund’s assets — that is, it will absorb up to $25 million in potential losses.

“Institutional investors will have a chance to participate in investments that are low-risk with an attractive rate of return,” said the source.

In parallel with the new financing plans, the Israeli government is also taking steps to enable Israeli companies to expand their Latin American operations.

According to the Central Bureau of Statistics, Israeli exports to Central and South America (excluding Mexico) were just $1.5 billion in 2017, a rise of $100 million from the previous year. The growth potential in emerging markets like Latin America is enormous, officials say. They already account for 55% of the world economy, a figure that is forecast to growth to two-thirds over the next decade.