NEW YORK (Jun. 18)
Shortly after Israel floated its largest bond issue in history, Finance Minister Benjamin Netanyahu was busy preaching the gospel of his free-market vision for the Jewish state.
The former Israeli prime minister came to town to meet with U.S. business leaders and media outlets like CNBC and Business Week. In a meeting on Monday with Israeli and American businesspeople at New York’s tony Harmonie Club, Netanyahu said that the push to further Israel’s development from a socialist-style backwater to a high-tech capitalist trendsetter is generating big dividends at home and abroad.
Israel “is the most rapidly liberalizing economy in the world,” Netanyahu said, explaining that he aims to make Israel “one of the five most attractive countries in the world in which to invest.”
The “road map” peace plan may be faltering, and Israel’s economy remains troubled by continuing violence and low tourism — but an upbeat Netanyahu was here to talk turnaround.
“For many years, we’ve been saying we need to do something about the Israeli economy,” he said. “We are.”
The free-market reforms of Prime Minister Ariel Sharon’s government may be paying off: Israel’s bond issue this week was expected to bring in $500 million, but after demand exploded to $2 billion, the government cut off borrowing at $750 million.
“It’s very encouraging to see how quickly the institutional markets responded” to the June 16 bond offer, Netanyahu said.
The 10-year bonds will yield 4.73 percent, 153 base points higher than U.S. 10-year bonds and Israel’s lowest rate to date.
More than 200 banks, insurance companies, pensions funds and other institutional investors from Asia to Europe bought in — including some from the Persian Gulf nation of Dubai, whom Netanyahu admitted “aren’t ardent Zionists.”
Investors are banking on two main developments for a return on their investment.
First, the markets are responding to the Sharon government’s moves to continue liberalizing Israel’s economy, which still retains vestiges of the state domination of Israel’s early decades.
Despite a number of steps to liberalize the economy over the past decade — including many during Netanyahu’s three years as prime minister — the public sector still accounts for 55 percent of Israel’s gross domestic product.
“We want to put the public sector on a diet,” Netanyahu said.
Coming with unemployment around 10 percent, recent budget cuts sparked public dissent and a general strike. But Netanyahu adheres firmly to supply-side economics.
Since June, the government has been working to trim the budget by nearly $500 million, with plans to cut another $500 million next year by encouraging layoffs and early retirement of “less productive” workers at an “unprecedented” clip, Netanyahu said.
At the same time, the government is moving to privatize its electric and phone companies, as well as major institutions such as Bank Discount, Bank Leumi and El Al airlines — whose stock rose some 300 percent in the first week after its initial public offering — and fight the powerful Histadrut trade union federation over pension cuts.
The government “is willing to face up to the unions, and is slaughtering one sacred cow after another,” Netanyahu said.
Netanyahu’s fiscal conservatism doesn’t stop there: He echoes President Bush when it comes to Israel’s personal income tax rates, which range from 10 percent to 50 percent.
“The most critical engine for economic growth is, you lower taxes,” Netanyahu said. “If people receive more money in their pockets, they work more, and that’s the first and most important boost you can have.”
Global investors are counting on the possibility that the Israeli-Palestinian conflict will ease, and that political or military pressure will win the war on terrorism and ease pressure on Israel’s economy, he said.
Israel also is embarking on major infrastructure projects such as the Trans-Israel Highway. Though tiny in size, Israel is”like Russia” in that it “takes hours” to reach areas outside the center of the country, Netanyahu said.
Israel’s renewed ability to win loans via the bond market is not the only measure of economic health in the Jewish state.
This week, New York State Comptroller Alan Hevesi said New York’s $109 billion retirement fund — the second biggest state pension fund behind California’s — was investing $200 million in Israel.
David Neustadt, a spokesman for Hevesi’s office, said Israeli market reforms were “one factor” in the decision to invest in “old-economy” businesses in the banking, media, industrial and retail sectors.
These areas of the economy “may be out of favor with investors, but they might have significant potential for long- term growth,” he said.
The Markstone Capital Partners Fund, a venture capital outfit managed by Ron Lubash, former head of the Israeli offices of Lehman Brothers, has pledged another $300 million in investment in addition to New York State’s cash.
In the past, the New York pension fund has invested about $78 million in Israel by buying Israel Bonds, and it also owns stock in Israeli companies.
Israel’s success in borrowing directly in the global market comes in concert with the success of its U.S.-based sales agent, Israel Bonds, a spokesman said.
“The reforms will lead to more confidence in the Israeli economy and retain the investment-grade rating” that Israeli bonds have secured, the spokesman said. “That leads to more sales.”
Since the beginning of the year, Israel Bonds has sold more than $900 million, and it is “well on the way” to reaching its $1.25 billion target, the spokesman said. Israel Bonds account for about 36 percent of the Jewish state’s foreign debt.
Netanyahu said $9 billion in recent U.S. loan guarantees that Congress approved this spring were the “wind in our sails” in helping to reinvigorate investor confidence in Israel.
But those who give Israel loans have seen returns, too. Since its creation in 1951, Israel Bonds has raised $25 billion. About$20 billion of those bonds have reached maturity.
Faith that Israel remains a good deal seems to be alive. The Israel Bonds spokesman said the outfit has retooled and is reaping the rewards, despite more than $5 million in cuts to the organization’s own budget in recent years, to about $35 million.
The state of South Carolina recently purchased $10 million in Israel Bonds; Guardian Insurance, the fourth largest U.S. underwriter, bought $20 million; and Bonds “expects a substantial New York State sale to be coming soon,” the spokesman added.
As Netanyahu told the businesspeople, “I don’t want you to come and help Israel; I want you to come and help yourself. Come and make money in Israel.”