The Tel Aviv Stock Exchange doesn’t seem to be paying much attention to the 15-month stalemate in Israeli-Palestinian peacemaking.
Despite the absence of a diplomatic breakthrough, the benchmark TA 100 index stood at 326.82 at the end of last week — almost double its level in July 1996, less than two months after Benjamin Netanyahu was elected prime minister.
“In 1994 and 1995 the peace process was in great shape, but the market was in the dumps,” says Daniella Finn, head of the international department at Hanot- Batucha Securities, a Tel Aviv brokerage firm.
“Looking at 1997 and 1998, it’s pretty much a consensus that the peace process is at a standstill, but the market is going through the roof.”
The stock exchange, says Finn, is moved by market fundamentals, such as interest rates and inflation, both of which are falling.
As in any market, this prompts investors to pump money into stocks, which offer more attractive yields than bonds and short-term savings accounts — which are based on interest rates.
The market’s apparent indifference toward the ups and downs of the peace process reflects a wider truth: Israel’s economy is driven by primarily economic factors. Only the tourism sector is directly affected by regional stability and politics.
And although economic officials say the peacemaking deadlock does affect the economy — which is experiencing a serious slowdown this year — they concede that its impact is difficult to measure.
Most experts agree that the peace process played an important role in Israel’s economic boom of the early 1990s.
When the Arab boycott weakened, immense Asian markets opened up to Israel — a move widely believed to be irreversible.
ECI Telecom, an Israeli manufacturer of telecommunications products, is among a large number of companies that have profited from this change. Some 17 percent of ECI’s 1997 revenues of $677.7 million came from sales in Asia. And last year — despite stalled diplomacy — ECI posted record results, with net profits climbing 30 percent to $132.4 million.
“The atmosphere was somewhat less positive than a couple of years ago,” says Michael Shalit, ECI’s vice president for new business development, describing how the stalled peace process has affected business.
“But this has not affected the bottom line,” he said.
In contrast, the bottom line in Israel’s tourism industry has been hit hard.
Tourism receipts account for about 3 percent of Israel’s gross domestic product, the aggregate value of goods and services in an economy. Between 1993 and 1995, progress in the peace process fueled unprecedented growth, with the number of tourists up about 12 percent per year.
The number of incoming tourists per year dropped 4 percent in 1996 and 3 percent last year. Industry players say potential tourists were deterred by a wave of Palestinian suicide bombings in early 1996, regional terrorism — such as last year’s massacre of 58 tourists in Egypt — and the stalemate in the peace process.
“Since 1996, the economy has lost about $3 billion from [potential] income of incoming tourists,” says Abraham Rosental, director general of the Israel Hotel Association. “Economic activity could also have been boosted by another $10 billion, since every tourism dollar generates another two or three in infrastructure development.”
Indeed, the tourism boom of a few years ago attracted sizable investments from international hotel chains, who do not want to lose the amounts they invested before the current crisis began.
Rosental says they have not yet lost hope: “In tourism you always have to be optimistic since your investment is long term.”
Indeed, international investment has not been limited to hotel chains. Since the Oslo peace process began in 1993, foreign investment in Israeli companies – – primarily in banks and high-tech firms — has jumped dramatically.
According to the Bank of Israel, foreign investment — through the Tel Aviv Stock Exchange or in equities listed by Wall Street — climbed from $900 million in 1994 to $2.8 billion in 1996.
It jumped to $3.7 billion in 1997, a figure Netanyahu often cites as proof that his political policies have no backlash on the economy.
But the sharp increase last year may be misleading, says Vered Dar, deputy director of the Finance Ministry’s economic research department.
Some investment in 1997 came from investors who started looking at the economy in 1993 and 1994, Dar says, adding that it is difficult to estimate how much higher investment would climb if the peace process were thriving.
Nevertheless, Dar has asked many foreign investors if the state of the peace process has influenced their investments.
“They don’t say it’s irrelevant,” she says, “but it is not a decisive factor in their decision to invest in Israel.”
Her impressions are backed by Gideon Schur, director of the Bank of Israel’s international affairs department.
“Foreign investors are interested in the economy for economic reasons,” he says. “They see great potential in high-tech, the government’s responsible economic policies, reduction of inflation and liberalization.”
Both officials, however, stress that a sluggish peace process exacts an economic cost.
“Its a factor you cannot ignore,” says Schur. “The atmosphere influences economic activity and willingness to invest. You cannot measure it, but it’s there.”
For example, he says, pessimism about the peace process puts a damper on investments by domestic companies.
A depressed atmosphere among domestic businesses also cools consumption, or individual spending, which is crucial for a growing economy.
Although these factors have contributed to Israel’s current recession, the slowdown is mostly attributed to the government’s economic policies, which are aimed at reducing a high budget deficit.
In the first quarter of 1998, the economy grew at an annual rate of just 1.2 percent, compared to an average of 6 percent a year between 1990 and 1995.
Unemployment has increased from 6.7 percent in 1996 to more than 8 percent today.
“I don’t think the current recession was caused by the peace process, but the cooling of the peace process certainly doesn’t help growth,” says Dan Propper, president of the Manufacturers Association, an organization representing Israeli industrialists.
Just the same, Propper is concerned that if the peace process stops completely, Israel will not be able to control the economic backlash.
“There are already signs that this is happening,” he says, pointing to the European Union’s recent threat to deny preferential export status to goods made in Jewish settlements in areas still under dispute between Israel and its Arab neighbors.
Indeed, regional economic cooperation is already suffering from the slowdown in peacemaking.
Although several joint projects with Jordan are proceeding as planned, the economic cooperation with Egypt and the Persian Gulf that Israel had hoped for has not materialized.
Instability has not yet frightened investors away, nor harmed the economy dramatically. But if the peace process collapses completely or violence breaks out, many businesspeople and analysts fear the situation could be very different.
If this happens, they say, it is unlikely that the stock exchange — or the rest of the economy — could calmly maintain its capacity to ignore politics.
The Archive of the Jewish Telegraphic Agency includes articles published from 1923 to 2008. Archive stories reflect the journalistic standards and practices of the time they were published.
