VZCZCXRO0796
RR RUEHROV
DE RUEHTV #0540/01 0641503
ZNR UUUUU ZZH
R 051503Z MAR 09
FM AMEMBASSY TEL AVIV
TO RUEHC/SECSTATE WASHDC 0849
INFO RUEHXK/ARAB ISRAELI COLLECTIVE
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 TEL AVIV 000540 
 
SIPDIS 
 
NEA/IPA FOR GOLDBERGER,SACHAR; EEB/IFD FOR JACOBY; TREASURY FOR 
BALIN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV ELAB IS
SUBJECT: DEPUTY BOI GOVERNOR SAYS ISRAEL POISED FOR STRONG RECOVERY 
WHEN RECESSION ENDS 
 
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Summary 
------- 
 
¶1.  Professor Zvi Eckstein, Deputy Governor of the Bank of Israel 
and Professor of Economics at Tel Aviv University says that for 
Israel, the economic crisis is entirely imported.  As a consequence, 
Israel's emergence from its economic downturn will happen only when 
the U.S. economy turns around since the U.S. is such an important 
export market for Israel.  He thinks that the U.S. is in for a long 
downturn, which will only begin to ease in the second quarter of 
¶2010.  At that point, Israel's good macro-economic fundamentals and 
export strength will position the Israeli economy to emerge strongly 
from the crisis.  Eckstein expressed great confidence in the 
leadership of the Obama administration and the ability of its top 
economic team to lead the U.S. and the world out of the crisis.  He 
also thought it likely that the new government in Israel would 
continue the fiscally responsible policies of its predecessors.  On 
the issue of Palestinian workers in Israel, Eckstein said that it is 
important that the costs to Israeli employers of hiring them be 
equalized to the cost of hiring other foreigners in order to protect 
the jobs of Israeli Arabs.  End Summary. 
 
------------------- 
As the U.S. Goes... 
------------------- 
 
¶2.  In a March 3 meeting with the Deputy EconCouns, Eckstein said 
that Israel's highly important export sector makes it vulnerable to 
the economic downturn in the U.S. and Europe (primarily the U.S.), 
although he characterized Israel's economy as "not as vulnerable as 
the economies of many other countries."  He thinks that the economic 
crisis will take a long time to play itself out in the U.S., and 
that the Israeli economy will suffer during the entire period as 
well.  Using the words "deep recession" to describe what is 
unfolding in the U.S. and the rest of the developed world, he called 
the present financial and economic crisis "the most globalized 
integrated financial crisis humanity has ever seen," adding that it 
was both "unexpected" and "amazing."  Noting that Israel's economy 
and banking system are fundamentally sound after numerous reforms 
and five continuous years of strong growth, he said that the country 
can nonetheless not escape the impact of the crisis.  Its strong 
export sector made it vulnerable to a recession among its 
"customers."  A recovery in this sector will have to wait until the 
advanced economies of the west, especially the U.S., begin to 
recover. 
 
--------------------------------------------- ---------- 
Pessimistic on Recovery but Confident in U.S. Leadership 
--------------------------------------------- ---------- 
 
¶3.  Eckstein noted that some officials in the developed world may 
have hesitated to put out pessimistic forecasts in the run-up to the 
crisis so as to avoid damaging the psychology of the markets. 
Similarly, he thinks that those putting out an optimistic scenario 
calling for recovery in the third quarter of 2009 may be similarly 
trying to "protect" the markets.  He said that many private 
forecasters and hedge-fund managers agree with his view that the 
financial sector will stabilize only in the second quarter of 2010. 
According to Eckstein, the downturn in the U.S. will have a second 
leg, and the worst is yet to come for Europe.  While highly critical 
of the European Central Bank's handling of the crisis, and going so 
far as to say that it is not clear if the EU will emerge from the 
crisis intact,  Eckstein expressed great confidence in the Obama 
administration and the U.S. economic leadership team.  He said that 
he is on a first name basis with the top U.S. officials and noted 
particularly Fed Chairman Bernanke's expertise on the causes of the 
Great Depression. 
 
------------------------------- 
Israel in Relatively Good Shape 
------------------------------- 
 
¶4.  Eckstein said that Israel is a "small boat in a stormy sea," in 
terms of its place in the overall world financial crisis.  The 
country has only become fully integrated into the world economy 
during the last ten years, and it is only in the last five years 
that its economy has really become stable.  At this point, Eckstein 
stressed that Israel's economy is fundamentally strong, noting the 
current account surplus in the balance of payments, low level of 
foreign debt, relatively reduced debt to GDP ratio, continued inflow 
of FDI, the strong and stable shekel, the government's responsible 
fiscal behavior, and the Bank of Israel's credible monetary policy. 
In comparison with the U.S., he said that the financial sector is 
quite conservative and the banking sector safe.  He was, however, 
less sanguine about the overall health of the insurance sector. 
 
 
TEL AVIV 00000540  002 OF 003 
 
 
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Hi-Tech Down but Defense Exports OK 
----------------------------------- 
 
¶5.  Eckstein said that demand for exports is down substantially, and 
that what does sell goes for lower prices.  With that, he said that 
Israel's exports are less affected than those of other countries. 
Defense exports, which account for 10-15 percent of GDP have not yet 
been materially affected by the slowdown.  Therefore, important 
companies such as Israel Aircraft Industries, Elbit, and Israel 
Military Industries, which export about 70 percent of their 
production, have not been hurt.  He also mentioned that Teva 
Pharmaceuticals, the world's largest generic drug manufacturer and a 
very large player in the Israeli economy, is well-managed and doing 
well.  High-tech exports generally, which account for almost 50 
percent of exports, are down, but are poised to recover quickly when 
the recession ends due to the constant development of new products 
in that sector.  Eckstein also mentioned the new Intel plant in 
Kiryat Gat as a major new contributing factor to Israel's basic 
export strength. 
 
-------------------------------------------- 
Unemployment Will Hit Eight Percent in 2009 
-------------------------------------------- 
 
¶6.  Eckstein noted that private consumption is down due to reduced 
consumer confidence, with decreased expenditures on both durable and 
non-durable goods.  The flip side of this is, however, that Israelis 
save about 15 percent of their income, which compares very favorably 
with the U.S. savings rate.  Unemployment is increasing, a problem 
for which Eckstein saw no easy solutions.  He noted, however, that 
the unemployment level started at a much lower level going into this 
crisis (below six percent) than it did going into the recession in 
2001-2002 (about 11 percent).  Eckstein expressed the hope that 
continuing implementation of programs to encourage employment (the 
"Wisconsin" Plan), and expanding the negative income tax will help 
deal with the unemployment problem.  He also reiterated the need to 
reduce the number of foreign workers in Israel.  Regarding some 
employers' decision to institute a four day work week to prevent 
having to lay off workers, Eckstein views it as a stop-gap measure, 
which will delay, but not ultimately prevent the layoffs.  He 
forecasts unemployment of 8 percent at the end of 2009. 
 
--------------------------------------------- ----- 
New Government Will Maintain Fiscal Responsibility 
--------------------------------------------- ----- 
 
¶7.  Eckstein called the choice of the Finance Minister in the new 
government "crucial."  Regardless of who assumes the position, he 
does not expect a change in the policy of the last few years 
vis-a-vis controlling expenditures.  The difficult financial 
situation should at least be helpful insofar as it limits how much 
the government now being formed will be able to pay out to potential 
coalition partners to encourage them to join the government. 
Eckstein believes that the present annual expenditure growth ceiling 
of 1.7 percent can move as high as 2.5 percent without doing much 
harm, as long as it is lowered again after the crisis passes.  Much 
depends on why the ceiling would be raised.  It would send a 
negative signal if it is raised only for political purposes--for 
instance, in order to increase child allowances to induce the 
Ultra-Orthodox Shas party to join the government.  If a pattern of 
seemingly out-of-control increased expenditures develops, that would 
result in higher debt at higher interest rates and an overall 
increase of the interest burden on the budget, similar to what 
happened in 2001-2002 recession. 
 
--------------------------------------------- --- 
Raising Cost of Employing Palestinians in Israel 
--------------------------------------------- --- 
 
¶8.  In response to a question on the status of a clause in the 2009 
budget arrangements bill designed to raise the cost to employers of 
employing Palestinian workers and bring it in line with the cost of 
employing other foreigners, Eckstein said that the bill, like the 
rest of the 2009 budget submitted to the Knesset last year, had not 
passed.  However, he expected the new government to support it.  He 
said that as of 2010/2011, according to a previous government 
decision, there will not be any legal foreign workers in Israel in 
the construction industry; they will only be allowed to work in 
agriculture and in caring for the elderly.  About thirty percent of 
construction work in Israel is done by Israeli Arabs, who earn about 
NIS 6,000 to NIS 8,000 a month (about USD 1500-2000).  Construction 
workers in the West Bank earn about NIS 2,000 a month (USD 500). 
Should the legislation ultimately pass in its present form, any 
extra fees charged to employers to employ Palestinian workers in 
Israel will be handed over to the Palestinian Authority.  He views 
this as a "tax" to prevent migration from the West Bank into Israel 
 
TEL AVIV 00000540  003 OF 003 
 
 
and thereby protect the jobs of Israeli Arabs.  Should there be real 
progress in the peace process, Eckstein said he expects the problem 
of West Bank Palestinians seeking to migrate to Israel in search of 
work to worsen considerably. 
 
CUNNINGHAM