Israel’s Economic and Fiscal Performance 2006
Despite the war in Lebanon this past summer and attendant consequences on military expenditure, tourism, and trade, the Israeli economy performed with surprising robustness in 2006.
Economic growth is estimated to have reached 5% in 2006. This growth is more heavily driven by manufacturing since the industrial product grew nearly 2% more than business sector product. This is despite an estimated 0.3% loss in GDP due to the war in Lebanon.
The most significant negative economic consequence of the war was on tourism, which had a total decrease of 25% for 2006, including a 46% drop from June to August; even the tourism, branch, however, is showing signs of renewed vitality, with an increase of 3.7% in the third quarter following the end of the conflict.
GDP per capita increased by over 3%, while the standard of living increased by 2.8%. Total consumption in the domestic market grew by 4.6%.
Israel ends 2006 with a balance of payments surplus of $3.9 billion, despite a 5.7% increase in defense-related consumption due to the war. Also, 2006 is the first year in the country’s history in which exports exceeded imports. Notable areas of export include the life sciences, in which exports increased 35% in 2006, for a total of $4.6 billion. 63% of medical equipment exported from Israel is sold in North America, but other markets include Europe and virtually all Arabic nations. Pharmaceutical exports, led by Teva Pharmaceutical Industries, Ltd., have nearly tripled since 2004. Though there was little change in the total trade balance with Europe, Israel’s trade balance with Germany specifically improved in the past year, with imports from Germany growing 9.4% for a total of $3.2 billion while exports to Germany grew 18.9% for a total of $1.75 billion
Government deficit in 2006 was nearly half that of 2005, despite the high cost of the Lebanon war and war-related compensation and support given by the government to local manufacturers; government support to local businesses increased by 41% to make up for war-related losses. The deficit equaled 1.2% of the GDP (1.32 billion euro) in 2006 and 2.4% (2.53 billion euro) last year. The reduction of the deficit can be mostly traced to increased government intake, which grew by 8.7%; the government expects a tax intake of NIS 6 billion from 2006. Expenditure grew by 5.4% during the same period.
Acquisitions and Investments
Foreign investment in Israel reached a record high of $23.7 billion in 2006, 240% of 2005’s total. Foreign direct investment totaled $13.4 billion. This includes a $1.5 billion investment in real estate including apartments. A New York Times article in late December described Israel as an up-and-coming real estate market, again, in spite of the recent war.
An example for a direct investment is The opening of and R&D center by the U.S. test and measurement giant, Agilent (a spin off of HP with $5.6 billion in sales in 2005), in Israel. Patrick J. Byrne, company president stated: The company plans to gradually increase its investment in Israel, including investments in Israeli research institutions
Additionally, foreign business made several large direct purchases and investments in Israeli companies. Some of the more recent purchases include:
- AOL acquired Relegence (financial news and information search technology company) for an estimated $50-$100M.
- Lucent acquires Haifa-based start-up, Mobiltec (a provider of content management software for wireless service providers) for $75 Million. This acquisition is Lucent's 4th investment in an Israeli company.
- NDS, an American secure communications company, purchased Israeli firm Jungo, based in Netanya, for $107 million (December)
- Microsoft purchased Israeli startup Gteko for an estimated $100-120 million. The company is the 6th Israeli company purchased by Microsoft, which also operates an R&D center in Haifa.
- NeuStar, an American telecommunications firm, acquired Followap, based in Haifa, for $139 million
- Johnson & Johnson acquires Israeli Colbar (owner of proprietary technologies in the field of reconstructive medicine and tissue engineering) for $159 Million.
- American data storage company Network Appliances acquired Topio, a software company specializing in data replication and recovery, for $160 million.
- Kyphon, an American medical technology firm, purchased Disc-O-Tech’s assets in the field of spinal cord medicine, including technological patents and related intellectual property, for $220 million.
- On July 30th, 2006 SanDisk, the world’s largest supplier of flash memory data storage products, acquired Israeli MSystems, disk-on-key creator, for $1.55B
- Warren Buffet buys 80% of Iscar Metalworking Companies (IMC) (an industry leader in the metal cutting tools business) for $4B. The deal is the largest acquisition ever by Buffett outside the U.S. and the third largest investment ever made by Berkshire.
- US computer giant Hewlett-Packard buys Mercury Interactive Corporation (a producer of software that tests and optimizes systems and software applications) for $4.5B
Overseas investment by Israelis also reached an all-time high in 2006 - $2.86 billion, 20% more than in 2005.
In November 2006 NASDAQ introduced Israeli Equities Index. The index includes 73 Israeli companies, with combined market capitalization of $50 billion. The United States is the only country with more NASDAQ-traded companies than Israel. According to NASDAQ’s executive vice president, "The companies in this index have played a critical part in Israel's increasingly influential role in key sector of the global economy."
Foreign investment in Israeli stocks traded on international exchanges grew in 2006 to reach $8.4 billion between January and November and consisted mostly of stocks in the high-tech sector. Foreign investment in Israeli stocks traded on the Israeli exchange (TASE) totaled $202 million between January and November, while foreign investment in government bonds reached $1 billion, twice the total bonds income of 2005.
Outlook and Current Situation
As of December 2006, Fitch Ratings has improved Israel’s foreign and local currency Issuer Default ratings (IDR) from Stable to Positive. Richard Fox, Head of Middle East and Africa Sovereign Ratings at Fitch stated, “The Positive Outlook reflects the Israeli economy's increased dynamism and resilience following the reforms of recent years, demonstrated by the limited economic impact of the war in Lebanon and strong rebound now underway.”
An article published in The Economist’s December 13 issue places Israel in the Top 5 of emerging markets and names it the fastest growing economy outside Asia, ahead of China and India. Israel, which ranked as the 48th biggest economy in 1980-84, has jumped ahead 12 places and is currently ranked 36th for 2001-05. The Economist ranks economies by size on the basis of their 5-year average GDP.
Also this year, the World Bank ranked Israel 5th for best investor protection. Israel is ranked as the easiest country to do business with in the Middle East and North Africa.
The World Bank report maintained Israel's overall ranking of 26 out of 175 countries for its business environment, and Israel also ranked 7th for the ease of receiving credit, 13th for ease of trading across borders, and 15th for ease of starting a business.