With global markets reeling and investors completely having lost faith in the financial system, the question needs to be raised whether Israel will turn into safe haven for investors fleeing financial turmoil. The Shekel continues to strengthen against the USD and many Israelis have been sending money back to Israel in droves.

But I can’t imagine that in this era of a truly global economy with global interdependence, Israel will remain largely unaffected by the surrounding turmoil. It just doesn’t make sense. It’s important to note that the Israeli banks have had some exposure to sub-prime as well as both Lehman Brothers and Wamu. While Israeli banks are know for their stinginess in lending money to ‘main street’, they tend to lend money no questions asked to the 10 powerful families the control the local economy. The question is how will these families be able to weather the storm. I hate to think of what will happen if they are unable to pay back their loans. We have started to see that with tycoon Arkady Gaydamak, basically offering his businesses at fire-sale prices in order to raise cash, and one local bank, Mizrachi, actually made a credit call on him.

According to Globes, Former PM and current opposition leader Benjamin Netanyahu, says that Israel needs to take strong steps to avoid falling into economic slowdown. The article says, “We must prepare for a severe slowdown.” He goes on to detail some measures that could be taken to avoid the meltdown. “In order to create rapid growth and use the crisis to strengthen the Israeli economy, we must cut taxes, implement economic reforms, and streamline government work. If we do this, when the global economy recovers, Israel will be in better shape.”

Investors should keep an eye on how the local government reacts to the growing nervousness over the economy. Any missteps could send Israel into an economic downturn that rivals what we see in Europe and the US.

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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.

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Aaron Katsman
www.IsraelNewsletter.com

It’s official. Israel is no longer an emerging market. Yesterday, ratings agency Moody’s joined Standard & Poor’s and Fitch, by upgrading its ratings for Israel. The government foreign and local currency bond ratings have been upgraded to A1 from A2, and the foreign currency ceiling for bank deposits has been upgraded to A1 from A2 as well.

This is another feather in the cap of the Israeli economy. It was only 6 years ago that Israel was on the verge of economic collapse, but thanks to then Finance Minister and former PM Benjamin Netanyahu’s courageous economic reform policy, the economy has strengthened considerably. By lowering taxes, limiting government spending and privatizing state owned industry, Israel has experienced some of the strongest growth outside China that world has seen in some time.

The sign of a strong economy is a strong currency. Over the last year, the Israeli Shekel is one of the 3-4 strongest currencies in the world.

“Fiscal reforms are paying off in terms of increased economic vibrancy, diversification and competitiveness, and to the benefit of strengthening tax revenues, in spite of tax cuts,” said Moody’s Analyst Joan Feldbaum-Vidra.

In spite of tax-cuts? Joan, it’s because of the tax cuts. This is another proof that supply- side economics is the way to go. If you increase the economic pie, you will have larger tax revenues even with lower taxes. How do you increase the pie? By cutting taxes. 

Disclosure: Author’s fund has no position in any other stock mentioned as of 4/18/08.

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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.

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By Aaron Katsman
IsraelNewsletter.com

A report issued by the Israeli Ministry of Finance yesterday went without much fanfare but confirms the health of the Israeli economy, and that the economic reforms put in place by former PM Bibi Netanyahu are working. The report stated that for the month of September, there was a budget surplus of 500 million NIS (about $125million).  Most of this surplus came from increased tax receipts. Keep in mind that Netanyahu’s reform centered on cutting taxes, cutting government spending, privatization and increasing economic growth in the private sector — supply-side economics in a nutshell. While all the naysayers continue to reject the evidence that the way to true economic growth is through this formula, the proof is in the pudding.

Once again we see that the government increased revenues while lowering taxes, through increased growth, and as a result more taxes actually being paid.

To the credit of current PM Ehud Olmert, he has left things alone, not screwing anything up (economically that is); no easy feat for a politician. He has even encouraged the continued privatization of government and quasi-government monopolies. Take for example Aliya (immigration to Israel). A recent government decision empowers private organizations like Nefesh B’Nefesh to take the lead in offering services to North Americans looking to move to Israel. This private organization has been more successful in the last 5 years than the quasi-governmental agency has been in the last 25. This is but a small example of how the private sector can get things done in a better and more efficient matter.

The next question is what should be done with the budget surplus? That’s for another post but in short…….. CUT TAXES!!!!!!!!!

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Aaron Katsman is the 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.

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