The Anglo playing a key role in jump-starting Israel’s economy
“We haven’t seen a contraction on a yearly basis in the Israeli economy for an awful long time, this is a very rare event.”
By EYTAN HALONANDREW ABIR(photo credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)
When Andrew Abir joined the Bank of Israel in the mid-1980s shortly after emigrating from Britain, his first task was to request a loan from the International Monetary Fund. Amid soaring inflation, the country was nearly bankrupt and had run out of foreign exchange reserves.Much changed in the following three decades, with Israel’s economy now overwhelmingly known for its fast growth and resilience in the face of crisis. During that time, Leeds-born Abir climbed the ladder at the central bank, experiencing almost every role in Israel’s premier financial institution before being appointed deputy governor in early February 2020.Even for an economist who is no stranger to coping with crisis, the coronavirus outbreak represented an extraordinary welcome for Abir as he entered his new office. Within just a few weeks, the true severity of the outbreak and its impact on global economies was starting to be understood.“The present situation is clearly an extreme event; it is the largest pandemic for over 100 years, and it is a healthcare crisis that has implications for the economy. If [it is] not managed properly, there are implications for a possible financial crisis,” said Abir, who continues to serve as a member of the bank’s monetary committee and supervisory council.“There is a tremendous amount of uncertainty: whether there is going to be a second outbreak of the virus, and we don’t know what is going on with the rest of the world and how they are coping with the virus. These are all forces of uncertainty for households and firms, trying to deal with the implications of what we’re going through.”A “first taste” of the economic fallout of the coronavirus outbreak was available on Monday, as the Central Bureau of Statistics published its first quarter data for the Israeli economy.Gross domestic product contracted by 7.1% during the first quarter of 2020, the CBS said, compared with the final quarter of 2019. Representing the first contraction of the economy since 2012, the contraction marks the greatest decrease in annualized growth since the turn of the century – surpassing contractions during the 2001 and 2008 financial crises.The Bank of Israel, holding its benchmark interest rate at 0.1%, also revised its growth estimates on Monday. According to the bank’s research department, GDP is expected to contract by a total of 4.5% in 2020, before growing by 6.8% in 2021.Unemployment is expected to decrease to 8.5% in the second half of 2020, and decline to approximately 5.5% toward the end of 2021. The estimates, the bank cautions, are still subject to significant uncertainty.“I have been surprised by how quickly we have come out of lockdown, and the implications for the second half of the year will be a little bit better than first feared,” Abir said. “We haven’t seen a contraction on a yearly basis in the Israeli economy for an awful long time, this is a very rare event.”
The economy will continue to be impacted for some time due to changes in people’s behavior, he added. Precautionary saving, hesitancy regarding flights and returning to restaurants are all factors likely to limit private spending.The Bank of Israel has played a critical role in navigating and mitigating the economic fallout of the pandemic, although its actions often do not attract the same level of coverage as prime-time government declarations regarding financial aid.When it comes to monetary policy, Abir draws a distinction between the current crisis and the global crisis of 2008, when the latter was a purely financial crisis where fiscal policy was “the major tool” to solve it. This time, monetary policy has an important role, but health factors will ultimately determine the economy’s fate.“We wanted to very quickly put in place a series of measures that were there to restore and calm the financial markets, and to reduce the cost of credit to both the government and corporations. There was also the relaxing of some restrictions on banks, to encourage the giving of more credit,” said Abir.Citing one particularly effective move, Abir explains that the bank’s purchase of government bonds in the secondary market, totaling NIS 50 billion, had an “immediate and marked effect in reducing the ills in the market,” and allowed the government to fund significantly larger demand for the assistance programs it was rolling out.Additional operations include ensuring a very low benchmark interest, quantitative easing and intervention in the foreign exchange market to prevent an overly appreciated shekel.While the fate of individual businesses is likely to depend on their precrisis levels of debt and the impact of the crisis on their business model, Abir emphasizes that Israel is in a “relatively good position.”As infection and mortality rates will be the major determinant of economic recovery, Israel’s success in quickly “getting a handle on the healthcare crisis” is certainly good news for the economy.These positive healthcare trends are combined with the strong fundamentals of the Israeli economy and the robust nature of the banking system entering into the crisis, including several years of healthy growth, a current account surplus, and a dramatic drop in debt-to-GDP ratio.“The central bank has been pushing for financial discipline throughout the last decade, precisely for times like these. Israel is in a very good place,” Abir said. “We are able to finance the government deficit, which will reach 11% of GDP in 2020, at interest rates of less than three-quarters of a percent. That is incredibly low by historical standards.”One notable side effect of the outbreak is likely to be the faster adoption of digital banking, as customers become accustomed to managing their financial deeds remotely. Investment in financial and digital education will be necessary for sectors less able to take advantage of the increasingly digital world, Abir said, including the elderly population.The rollout of contactless payment systems is also likely to be accelerated in the next six months, as Bank of Israel reforms meet rising public reluctance to enable others to touch their credit cards or handle change.“Cash will still exist and has a role, but I think we’re moving closer to the Swedish model, rather than the old model where cash was king,” Abir said. “There are sectors that will be quicker to go down this road, and sectors that are slower, but it is something that will happen.”AS ABIR reflects on more than three decades at the Bank of Israel, rising to become one of the leading Anglos in Israel’s public sector, he describes his experiences as both “incredibly exciting” and a “great privilege.” He also states that being “linguistically challenged in Hebrew” is not necessarily a barrier to success when combined with willpower.Far from needing urgent loans from the IMF, Israel’s foreign exchange reserves now stand at about $145b., enabling the country to remain resilient when faced with financial crisis.“You cannot be involved in these processes or have such an impact on the growth of the State of Israel in the private sector,” says Abir. “Ideology has impacted my choice of career. I wanted to have a career with influence and impact on policy in Israel.”For new immigrants arriving in Israel today, the labor market caused by the coronavirus outbreak is likely to reflect the one that Abir encountered upon his arrival in Israel.“Someone just arriving in the country or coming out of university will need to be flexible in getting into the labor market, and it will be more demanding for immigrants,” he said. “You need to be willing to wait for the dream job, maybe study for a degree, wait for an opportunity and just be patient when getting onto that career ladder.”
