Written by: Aaron Katsman | August 12, 2008
Of late, the Bank of Israel has maintained that due to slowing global growth, they believe that inflation will be kept in check. Many market participants have accepted that view. Now along comes the Economist Intelligence Unit (EIU), and challenges that assumption.
According to a report in Globes, ” ..But the EIU believes inflation in Israel will remain high, and says that “the Bank of Israel’s monetary policy will continue to be contractionary.”
While to many this may seem to be an argument of little importance, it actually may potentially determine the direction of both local interest rates and where the shekel trades in both the near and mid-term.
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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
Written by: Zack Miller | July 20, 2008
As inflation rears its head around the world, Israel is no different from many other countries that have seen prices spike as of late. Where Israel differs from the rest of the world is not in experiencing inflation, but how the economy is leveraged to it.
Let me explain: Israel suffered from bouts of hyperinflation during its 60 years of existence. Most salient was the 1970s which saw double digit inflation throught the decade, culminating in 100+% inflation in 1979. The beginning of the 1980s introduced stagflation and saw even higher inflation rates.
Here’s where the history impacts today’s Israel: in an effort to combat hyperinflation, Israel created an 
economy-wide phenomenon of CPI-linked debt. This debt is not specific to a specific sector and according to a report produced last week by UBS’s Israel analysts, may compose over 50% of corporate debt, over 60% of the government’s shekel debt, and 60% of mortgages.
After the last couple of boom years 2005-2006, most of the corporate debt raised by Israeli firms is also linked to the CPI. Merrill Lynch is out this morning as well with a study on the effects of higher CPI on Israeli firms.
The money line from the UBS report: However the spike in CPI in Q2 could affect the bottom lines of many Israeli corporates and we are concerned that a continued high inflation could continue to weigh on the profitability of many Israeli companies.
So, what’s an investor in Israeli firms traded in the U.S. to do? UBS suggests underweighting those institutions with high CPI exposure. The storm feared by analysts would play out with consumers being hit with rising prices in the market also being compounded with resets in adjustable rate mortgages that are linked to the CPI. In turn, this could curb consumer spending which is playing a bigger and bigger role in GDP growth.
While Olmert clings to a feeble position in a government beset by scandal, UBS suggests that “the rise in CPI will also have fiscal implications as the Government could be squeezed by paying more on its CPI linked debts as well as collecting less corporate taxes.”
Zack Miller
IsraelNewsletter.com
(Another Globes article out this morning entitled ‘Ticking Bomb‘)
