Taking Stock / Hijacking Netanyahu's Message

It was a great quarter. The stock market can't remember the last time first-quarter financial statements were that good.

The brightest star of the lot was The Israel Corporation, which netted NIS 480 million, the highest in its history. The two big banks also did beautifully: Bank Leumi brought home NIS 528 million, and Bank Hapoalim made NIS 930 million in profit. Teva Pharmaceuticals beat both, however, with net earnings of NIS 1.1 billion.

These stunning figures came out just as it appeared that economic growth slowed in the first quarter. The Bank of Israel's index of combined indicators and Central Bureau of Statistics figures all indicated that the pace had decelerated, after its acceleration in 2004. Is there some contradiction here? Are the Bank of Israel and Central Bureau of Statistics detached from reality? Or do the corporate profits not really reflect the state of the economy? Should other parameters be sought?

No, there is no contradiction between the figures coming from the capital market and the macroeconomic data. The explanation lies in the vast gap between the handful of enormously powerful companies and the rest of the marketplace. People owning small- and medium-sized businesses felt their blood curdle as they read about the enormous profits made by the giants: They're certainly not part of the party.

The condition of most businesses has picked up in the last couple of years, but the condition of the big corporations improved so dramatically that they seemed to be existing on another planet entirely.

We can name at least three differences between these corporate monsters and the smaller businesses.

1. The big companies have more access to the capital market, and in the last couple of years they've taken advantage of the boom on the market to raise tremendous sums. The Tel Aviv Stock Exchange is awash in freshly offered corporate bonds. In the last two months alone, companies raised NIS 10 billion through bond offerings, a scope unprecedented in Tel Aviv history. But the prerogative of tapping the market through debt offerings is reserved mainly for the biggest companies.

2. Most of Israel's biggest companies are monopolies in their areas, allowing them to preserve both their market shares and their fat profits, though competition elsewhere is intensifying. This is true of Bank Hapoalim and Bank Leumi, as well: Their power has merely grown stronger over the years at the expense of the smaller banks. Also, much of their profit from the markets and economic recovery seeps straight down to their bottom lines. Moving on to the cellular carriers, they managed to bend the regulator in the battle over lowering interconnect fees, enabling them to again present excellent results for the first quarter of 2005.

3. The big companies dominate exports and multinational operations. The results of The Israel Corporation, for instance, are influenced by the booms in the international commodities market, in chemicals and in shipping. Its eye-popping profit of almost half a billion shekels in the first quarter resulted from record earnings at Zim (shipping), Israel Chemicals (thanks to potash and bromine) and Oil Refineries (profit doubled thanks to the surge in crude prices).

Smaller companies are much more dependent on the domestic market, where growth is far lower and business much harder.

In the last two years, Finance Minister Benjamin Netanyahu managed to imbue the concept that the economy must rely on a strong business sector; without company profits, he has preached, the state won't have tax revenue to finance the poor.

His direction is right: Raising tax and weakening corporate Israel won't solve social ills. But the owners of the big companies, who hijack Netanyahu's view to prove that the government and regulation should bend in their favor, are misleading the public. The true drivers of growth, and the greatest source of jobs, are the small- and medium-sized businesses.

The tremendous profits of the monopolies and giant corporations translate into very few new jobs. The boom on the stock market, as shown in rising share prices as corporations present record earnings, does filter throughout the economy, but it is far from being enough.