US embassy cable - 05TELAVIV3188

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 003188 
 
SIPDIS 
 
E.O. 12958: DECL: 05/24/2015 
TAGS: ECON, PREL, IS, ECONOMY AND FINANCE 
SUBJECT: ISRAEL: MODERATING FIRST QUARTER GROWTH POSES 
SMALL RISK TO ANOTHER GOOD YEAR 
 
Classified By: Economic Counselor William Weinstein for Reasons 1.4 (b, 
d) 
 
1. (U) Israeli growth moderated in the first quarter of 2005 
to 2.9%, following four quarters of growth in 2004 between 
3.5 to 4.4%.  Business sector GDP grew by 3.4%, which was 
also lower than any quarter in 2004.  The overall 
deceleration reflected moderating growth of both exports and 
imports during the quarter.  The slowdown did not come as a 
surprise.  The Bank of Israel (BOI) writes in its May 
Economic Developments report that  &signs of a slower pace 
of expansion in the economy were apparent before the 
beginning of 2005.8  This was reflected in moderating growth 
since the second quarter of 2004 in both the BOI,s S-index 
(composite state of the economy index); and in the exports of 
goods and services, excluding high tech companies and 
diamonds.  The key question on economists, minds, which will 
require more than one quarter of data, is whether the growth 
slowdown is temporary or represents a fundamental change in 
the growth trend. 
 
2. (SBU)  Israelis with whom we have spoken are unconcerned 
about any significant, long-term slowdown, ascribing the 
numbers either to technical factors or to a change in the 
makeup of growth.  Finance Ministry Director General Bachar 
ascribed at least part of the moderation in a May 19 radio 
interview to uncertainty relating to disengagement, as well 
as to the last minute approval of the 2006 budget.  Finance 
Ministry staff continue to forecast 2005 growth at 3.8%. 
Bank Leumi's Gil Bufman refers to the quarter as a "speed 
bump" that hides a more fundamental shift in the economy from 
export-led to domestic-led growth.  He stands by an estimate 
of 4% growth for the year, only slightly lower than his 
previous forecasts. 
 
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Trade: Moderating Growth 
------------------------ 
 
3. (U) The Central Bureau of Statistics (CBS) reports that 
Israeli exports of goods and services grew by 4.2% in the 
first quarter of 2005 compared with a year before, a slight 
deceleration from the 5.0% growth rate in the previous 
quarter.   First-quarter growth was led by an impressive 
69.8% jump in tourism receipts, which are counted as a 
services export.  Agricultural exports also did well, 
increasing by 35.6% in the quarter.   Factoring in the first 
quarter's figures, the Ministry of Finance forecasts overall 
2005 export growth of 6%, following the very attractive 
growth rate of 14.9% in exports in 2004. 
 
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Tourism Gain Reflects Improved Palestinian-Israeli Relations 
--------------------------------------------- --------------- 
 
4. (U) Improved relations between Israel and the Palestinian 
authority, and decreasing terror attacks led tourism's star 
to continue to shine.  (Note: Tourism is counted as a 
services export.)  Arrivals in the first quarter of 2005 
increased 25% compared with the same quarter one year before, 
to 372,700 from 297,700.  The GOI plans to capitalize on the 
improvement through efforts to encourage more American 
Christian tourists to visit Israel.  It will set up a special 
office in the U.S. dedicated to promoting religious tourism 
linked with plans to set up a bible center near the Sea of 
Galilee.  In its efforts to cater to another group of 
tourists, the GOI is also investigating the option of opening 
a casino in the southern town of Eilat. 
 
------------------------------------ 
Imports: Disappointing First Quarter 
------------------------------------ 
 
5. (U) Imports declined by 1.4% in the first quarter of the 
year compared with the previous quarter.  Compared to the 
same quarter one year before, however, first quarter 2005 
imports showed growth of 11.8%.  Furthermore, the import 
slowdown is not centered in areas linked to future economic 
growth: Statistics comparing the first four months of 2005 
with the first four months of 2004 show that raw material 
imports were 13.2% higher in 2005, durable goods imports 
increased by 8.3%, and investment goods increased by 5.6%. 
Another point to note is that as the Passover holiday came at 
the end of April this year, imports may have been somewhat 
lighter in the first three months than years when Passover 
falls earlier. 
 
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Israeli Consumption Moderates as Well... 
---------------------------------------- 
 
6. (U) Private consumption expenditure increased by 0.8% in 
the first quarter of 2005, a fairly disappointing figure that 
represented a drop in per capita consumption.  This figure 
was lower than in any quarter since the first quarter of 
2003.  The moderation may, however, be a reflection of the 
unusually high growth rate of the fourth quarter of 2004.  To 
give just one example, after consumption of durable goods per 
capita surged 49.6% in the fourth quarter of 2004, it fell 
16.5% in the first quarter.  Total expenditure for private 
consumption declined by 1.6%, and indicates that the standard 
of living did not increase.  As Passover came late, it could 
be that the second quarter will see a boost in private 
consumption. 
 
7.  (U) The GOI,s efforts to rein in spending continues to 
bear fruit, evidenced by a 7.2% decrease in general 
government consumption the first quarter of the year. 
Although this did not help short-term growth, continued GOI 
rightsizing bodes well for the future (and conforms to USG 
goals outlined in the bilateral Loan Guarantee Agreement). 
 
--------------------------------------- 
... as Unemployment Drops Significantly 
--------------------------------------- 
 
8. (C) According to the Finance Ministry's chief economist, 
Michael Sarel, figures published May 25 show unemployment 
fell from 9.8% - 9.1% during the first quarter.  Employment 
grew by 33,000 positions during the period.  Even more 
importantly, according to Sarel, the number of full-time jobs 
increased during the quarter, significantly outpacing a drop 
in part-time positions.  Although this will not translate 
directly into increased wages and consumption, these are 
likely to come over time.  Bufman was equally enthusiastic 
about the news, but noted he expects unemployment to remain 
at the new figure for quite some time. 
 
--------------------------------------------- ------------ 
The Deficit:  GOI Says Will Remain within Budget Framework 
--------------------------------------------- ------------ 
 
9. (C) The GOI is on track to meet its 2005 deficit target, 
which was increased to 3.4% of GDP (NIS 18.8 billion) from 
3.0% to accommodate disengagement.  According to Deputy 
Budget Director Yossi Gordon, tax revenues are coming in at 
levels which will result in a deficit below the target while 
allowing for significant tax cuts desired by Minister 
Netanyahu.  According to GOI numbers, the State collected NIS 
52.3 billion for the first four months of 2005, compared with 
NIS 50.4 billion in 2004.   Gordon notes the GOI is likely to 
finish June with a small budget surplus for the year to date, 
from which he draws the conclusion  "There is no threat to 
the 3.4% deficit target in 2005."  Gordon's optimism does not 
extend to 2006, however, as Finance still does not have a 
comprehensive estimate of total disengagement costs.  "2006 
is made even more uncertain by the fact that it will most 
probably be an election year," Gordon noted. 
 
------------------------- 
Privatization News: Bezek 
------------------------- 
 
10. (U) On May 9th the GOI sold 30% of the State's 46.4% 
holdings in Bezek to the Apax-Saban group for USD 974 million 
(NIS 4.3 billion).  The sale was executed through a tender 
process in which two groups competed. The Apax-Saban group 
has the option of purchasing another 10.66% within four 
years.   Following the sale, the State of Israel holds 16.4% 
of the shares.  This marked a significant step forward in 
Finance Minister Netanyahu,s privatization efforts, as the 
GOI has been trying to sell Bezek for more than 15 years. 
The Prime Minister said following the sale, &The fact that 
groups with a global reputation like the Saban and Apax 
groups have expressed interest in Bezek shows that the 
Israeli economy is winning the confidence of world markets.8 
 
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Bank of Israel: A New Era 
------------------------- 
 
11. (U) Stanley Fischer assumed the Post of Governor of the 
Bank of Israel on May 1, joining the Bank at a period of 
historically low inflation and interest rates (currently 
3.5%).  The Fischer era may ring in significant change for 
the Bank.  He has come out in favor of replacing the Bank of 
Israel law with a new law, which will maintain the Bank,s 
independence while providing a sounder legal basis for the 
Bank,s activities.  He is also in favor of implementing the 
Bachar banking and capital market reforms and reducing 
Israel's large national debt burden.  Initial reports 
indicate that he supports the current tax plan being prepared 
by the Ministry of Finance. The new Governor follows in the 
footsteps of his predecessor on social issues, having 
expressed a need for a policy that will better assist the 
elderly, infirm, and disabled. Bufman expects Fischer to 
become involved in a wider range of policy issues than his 
predecessor, David Klein, "I expect Fischer to use his 
official position as economic policy advisor to the Cabinet 
to become involved in a wide range of issues, including the 
economic aspects of peace negotiations between Israel and the 
Palestinians."  A prominent foreign banker noted that Fischer 
has already brought "a new professionalism" to the bank's 
activities. 
 
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U.S. Economy a Concern 
---------------------- 
 
12. (C) Both Sarel and Bufman said the course of the U.S. 
economy remains their biggest current concern.  Bufman 
expressed particular concern about the possible advent of a 
housing bubble in the U.S.  A significant downturn in the 
housing sector was likely seriously to impact overall U.S. 
growth, leading directly to a reduction in demand for Israeli 
exports.  "I think risks coming from the U.S. economy now 
outweigh regional geopolitical risks," Bufman noted.  Sarel 
echoed Bufman's concerns, noting Israel's vulnerability to 
economic shifts in the U.S. 
 
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