Mixed Signals On The Fiscal Front

If the Israeli economy were a patient, doctors wouldn’t know whether to release it with a clean bill of health, keep it overnight for additional tests or simply prescribe vitamins to perk it up a little. That’s how confusing the symptoms are at the start of 1999.
Consider:
# Israel’s economy last year grew just 1.9 percent, down from 2.4 percent in 1997 — the slowest rate in the decade, according to the Central Bureau of Statistics.
# The economic crisis in overseas markets has made many American investors shy about investing in non-U.S. securities, including Israel. In 1997, $3.45 billion poured into Israel from foreign investors, but the figure dropped 40 percent last year to $2 billion, according to the Bank of Israel.
# Unemployment remains at 9 percent. Many of the high-tech jobs are for the well-educated, not blue-collar laborers.
Against that background come the following contradictory reports:
# Moody’s Investors Service, one of the leading international rating agencies, assigned an A2 rating to shekel-denominated bonds last month — the first time it has rated them. Moody’s explained that the rating “reflects Israel’s recent history of impressive economic reform and financial consolidation, its solid and diversified economy, and strong external support that Israel has received to date from the U.S. government and the Jewish diaspora.”
# Israel recently sold on the open market $250 million in 30-year bonds. The sale, held the second week of December, marked the first time Israel had offered bonds longer than 10 years without the support of the U.S. government as a guarantor.
# The introduction this month of the single European currency, the euro, is expected to limit investment opportunities in Europe and focus investors’ eyes overseas. Christa Marti of Warburg Dillon Read in London told the Jerusalem Post: “From that point of view, they will look at the best-rated economies — and Israel is definitely the top ranking.
One way to explain the apparent contradiction is that Israel has two distinct economies — domestic and export. Although the domestic is flat, with no sign of improvement on the horizon, its high-tech export economy, which includes software and telecommunications equipment, is thriving.
The president of the Association of American-Israel Chambers of Commerce, Alan Schonberg of Cleveland, said Israel’s high-tech sector and information systems are “booming like there is no tomorrow.”
“They are outdoing Silicon Valley,” he said. “They also help the economy. Although they don’t change the basic numbers, they add vibrancy and bounce to what might be an otherwise dead economy.”
“It’s very, very strong,” echoed Manhattan attorney David Stone of Weil Gotshal & Manges, which is believed to have the largest domestic law practice dealing with Israel-related matters. He said that despite economic turmoil in Russia, southeast Asia and Brazil, Israeli “technology and products are good” and Israeli companies have positioned themselves to sell to growing markets.
“There is no reason to think that won’t continue,” he said.
In fact, Stone said, Texas Instruments is preparing to announce plans to pay $50 million for an undisclosed Israeli computer company — the first time Texas Instruments has invested in Israel. Stone said Texas Instruments plans to keep all the employees and use the firm as a major research lab.
Ron Chaimoviski, Israel’s new economic minister for North America, observed that trade between Israel and the United States jumped 17 percent last year and said “we hope to accelerate the trend in 1999.” He noted dozens of companies from around the world made significant investments last year in Israeli companies and technologies. Among them were 3Com’s $5 million investment in Orion Fund, Cisco System’s $50 million acquisition of CLASS Data, and Lucent’s $117 million acquisition of Lannet and its $50 million purchase of WaveAccess
And Stone said he has witnessed a resurgence of business activity in the last several weeks.
“Public offerings by Israel companies were dead for six or eight months, and now they are almost beyond my ability to deal with them,” he said. “I’m now handling five or six of them. Some are from new companies, and others are from companies that have spent their money, are continuing to grow and need more to finance that growth.”
Chaimoviski noted that two dozen Israeli start-up high-tech, biotech and communications companies held a conference in Boston recently in an attempt to develop joint ventures with American firms. He said more than 160 American companies attended.
“I have no doubt they are going to establish business connections,” he said.
There is disagreement about the impact on the economy of the stalled peace process and the May 17 elections in Israel.
Schonberg said the upcoming elections may cause “bewilderment and wonder about what the new government is going to be, and that will not help things between now and June.” But he suggested that a feeling of optimism might arise from a belief that a new government would bring about a better future.
Stone, however, said he saw no evidence that the upcoming elections or the “ups and downs of the peace process are affecting exports.”
“The people who buy components for telecom companies persist in buying,” he said.