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‘)

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Israelis business used to be characterized by brilliant technologies looking for a problem to solve.  No longer.  With MBA programs in Israel growing and more and more Israelis seeking training abroad, Israel management is seeing a tremendous upgrade in non-army qualifications, experience, and training.  Kellogg School of Management has been running a successful EMBA program in Israel for years (see here). Now, we’re seeing more and more Israelis go abroad for their studies.

Today’s Globes has an article about this phenomenon.  The US-Israel Educational Foundation (USIEF) (the Fulbright Program) reports that 110 Israeli students will begin MBA studies in the US in the upcoming academic year.  Typically, Israel sent 60-70 to foreign MBA programs.  This is the 3rd year in a row where over 100 Israeli students will study business abroad. (Continue »)

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As Israel turns 60 this week, here are a quick few economic stats on the State of Israel:

• Forecast GDP growth in 2008 recently cut to 3.2%. 2007 GDP was 5.3%.
• 7.2 million citizens, per capita income reached about $21,000 in 2007
• In a recent study the IVC Research Center eports that the capital available for investment in the hands of Israeli VCs is now at $2 billion, making conditions ripe for the number of investments we’ve seen in the past couple of weeks. In 2007, Israeli venture capital funds raised a total of $1.1 billion (including venture lending), 21% more than in 2006.
• The Central Bureau of Statistics announced last week that Israel’s unemployment fell to a seasonally adjusted 6.7% in Q4/07, compared with 7.2% in the preceding quarter and 7.8% in Q4/06. This is the lowest rate of unemployment in Israel since the early 1990s and the first time it has fallen below the 7% level
• Spending by foreign tourists in Israel totaled US$2.4 billion last year, 16.5% more than in 2006. (Central Bureau of Statistics)
• Berkshire Hathaway Inc. Chairman Warren Buffett said on Saturday that the company’s acquisition last year of the Israeli firm Iscar has worked out better than expected. Buffett said that he had very high expectations when Berkshire struck the deal, and that the metal-cutting-tool maker has “exceeded that in every way.” “It’s been a dream acquisition,” he said.
• Israel has more companies traded on Nasdaq than any other country other than US. Here is a list of Israeli stocks traded in the U.S.

Zack Miller is Managing Editor of Israel Opportunity Investor, the only subscription newsletter focused on opportunities in Israeli stocks.
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