US embassy cable - 04TELAVIV2271

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 002271 
 
SIPDIS 
 
E.O. 12958: DECL: 04/19/2009 
TAGS: ECON, EFIN, ETRD, ELAB, PREL, IS, ECONOMY AND FINANCE 
SUBJECT: BIBI BULLISH ON ISRAELI ECONOMY TO CODEL ISSA 
 
 
Classified By: DCM Richard LeBaron, per 1.4(b) and (d). 
 
1.  (C) Summary: An ebullient Binyamin Netanyahu told CODEL 
Issa April 14 that Israel's economy is continuing to improve 
now that reforms are beginning to take effect.  Netanyahu's 
"success" in battling the unions, GDP growing at 3 percent 
this year, pension reform, and lower taxes are all 
contributing factors.  The GOI intends to keep its focus on 
reducing the deficit and to invest in infrastructure, 
including the completion of the Trans-Israel Highway, as well 
as a rail system to connect Ashdod port with the Red Sea port 
of Eilat.  It further intends to reduce the number of foreign 
workers in Israel to lower the unemployment rate among 
Israelis and thus reduce state expenditure on welfare 
benefits.  CODEL Issa raised concerns about U.S. companies 
being shut out of competition on the natural gas pipeline 
network and cellular phone contracts, both of which Netanyahu 
promised to look into.  A Bank of Israel official was also 
upbeat on the direction of the Israeli economy, but cautioned 
that the GOI still had some way to go in its reforms.  End 
Summary. 
 
2.  (C) An energized Binyamin Netanyahu told Congressman 
Darrell Issa and House International Relations Committee 
staff member Hillel Weinberg April 14 that the Israeli 
economy is moving in the right direction under his guidance 
at the Ministry of Finance.  Charge d'Affaires Richard 
LeBaron also attended.  Opening the meeting, Netanyahu said 
that in his two-year tenure to date union wages had been 
lowered, the government's work force reduced by 2 percent, 
the VAT lowered to 17 percent from 18 percent, and the income 
tax reduced as well.  The economy is currently growing by 3 
percent and the stock market has risen by 100 percent since 
last year, he added.  Crowing over his victory against the 
unions, Netanyahu described how he had wrested control of the 
pension system from the unions and raised the retirement age 
from 65 to 67 in order to pay for necessary restructuring and 
to balance the books.  The next and last step is to privatize 
the union pension system and the state-owned banks. 
Netanyahu said that he intends to decrease the number of 
foreign workers in Israel in order to reduce the number of 
Israelis living off of the state's welfare benefits.  This 
would, in turn, contribute to a lowering of state 
expenditures.  Although many of his reforms are unpopular (as 
demonstrated by the number of strikes Israel has weathered), 
Netanyahu said that he had taken a lesson from U.S. Federal 
Reserve Chairman Alan Greenspan who applies two questions to 
evaluate the health of an economy to gauge the health of the 
Israeli economy.  First, is the stock market rising?  The 
answer, he said, clearly is "yes."  Second, are the rates for 
long-term bonds falling?  Again, Netanyahu reported the 
answer in Israel was a resounding "yes."  Saying his main 
report card is the behavior of the markets, Netanyahu clearly 
thought he had scored well. 
 
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Investing in Infrastructure 
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3.  (C) Netanyahu announced that the GOI intends to construct 
a rail line as a land bridge to connect the Red Sea port of 
Eilat with the Mediterranean port of Ashdod, the goal being 
to develop a route to compete with the Suez Canal.  Goods 
would move by rail to Ashdod and then by ship across the 
Mediterranean.  Netanyahu pointed out that almost two thirds 
of all shipping containers currently return to Europe from 
Israel empty; the new rail line would make filling the 
containers easier, in particular facilitating the movement of 
Dead Sea minerals to the coast for export.  Netanyahu also 
said that the GOI is investing in the completion of the 
north-south Trans-Israel Highway, which will assist in 
opening up the southern regions of Israel, in particular the 
Negev.  With regard to the purchase of natural gas from 
Egypt, Netanyahu said that he wants competition for all gas 
suppliers, including the Egyptians, British Gas, and the 
Israeli-American supplier. 
 
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"Level the Playing Field for U.S. Business" 
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4.  (C) Congressman Issa congratulated Netanyahu on all of 
the reforms that have been implemented during his tenure at 
the ministry, but noted that the VAT, even at the new rate of 
17 percent, remains high.  Netanyahu agreed, adding that he 
hopes the rate will go even lower in the future.  Turning to 
the development of a domestic pipeline for gas distribution, 
Congressman Issa stressed that by hiring a Dutch firm to 
design the pipeline, Israel appears to have committed to 
using Dutch specifications for the pipeline's construction -- 
a situation that clearly cuts out American firms from the 
process, despite the fact that U.S. technology is the world 
standard.  Netanyahu agreed, seemingly surprised by the news. 
 He said he would look into the matter. 
 
5.  (C) Moving on to cellular communication, Congressman Issa 
said that the United States wants only a level playing field 
for U.S. companies to enter the market.  For example, 
Qualcomm is a world leader in CDMA (code division multiple 
access) or fixed wireless technology, but not on the GSM 
system standard used in Europe and in some countries of the 
Middle East.  In Saudi Arabia, the SAG had held an open bid 
for the cellphone system, but only on the GSM system, leaving 
no room for CDMA despite CDMA's far lower cost for domestic 
users and an area where U.S. firms such as Qualcomm excel. 
Issa asked that Israel leave room for both technologies to 
develop and let the markets themselves decide which will 
predominate.  Netanyahu said that Israel intends to privatize 
Bezeq (the Israeli telephone service) and he promised to 
examine the possibilities of taking the two-system approach 
advocated by the Congressman. 
 
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Israel Bank Also Upbeat 
----------------------- 
6.  (C) Karnit Flug, head of research at the Bank of Israel, 
was somewhat less ebullient than the FinMin, but still upbeat 
in her April 14 discussion with HIRC staff member Hillel 
Weinberg.  Flug said that while there had been an initial dip 
in the Israeli economy in 2001, it is difficult to determine 
how much of that could be related to the Intifada and how 
much to the poor state of the world economy at that time. 
The effects of the Intifada were initially felt in areas such 
as tourism, but those effects gradually spread to other parts 
of the economy as investors realized that the uncertainty 
connected with the Intifada was going to be a longer term 
phenomenon. 
 
7.  (C) Flug reported that the spike in unemployment in year 
2000 had leveled out in 2003, with the export sector clearly 
leading the recovery.  The GOI is serious in its efforts to 
limit the number of foreign workers in Israel, the number of 
whom almost matches the current rate of unemployment.  Flug 
disputed the conventional wisdom that foreign workers take 
jobs that Israeli citizens would not.  As an example, she 
cited the approximately 35,000 Israeli Arabs who had been 
employed in the construction industry up until the 
mid-1990's.  Now, because foreign labor is so inexpensive, 
virtually all of the positions are now held by foreign 
workers. 
 
8.  (C) Calling the current government's fiscal policy "more 
responsible and determined," Flug gave FinMin Netanyahu high 
marks on his willingness to take tough measures to reduce the 
deficit (Note: the goal for 2004 is 4 percent.  End note). 
That, in turn, allowed the Bank to ease interest rates.  She 
cautioned, however, that the GOI still has a long way to go 
to reduce the size and cost of government expenditures. 
 
9.  (U) CODEL Issa did not have an opportunity to clear this 
message. 
 
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