Jerusalem, 19 March 2000

Bank of Israel Publishes Annual Report of the Controller of Foreign Exchange

(Communicated by the Bank of Israel Spokesman)

  • Net investments by nonresidents in Israeli shares amounted to a record $ 3.5 billion in 1999, reflecting the country’s comparative advantage.
  • The non-banking private sector reduced its net foreign-currency position in 1999, by a significant $ 4.7 billion, in view of its assessment that exchange-rate risk was higher than in the past.
  • The considerable demand for foreign currency by the non-banking private sector, against the backdrop of its reduced exposure to depreciation, did not lead to shocks in the foreign-currency market because of the supply of foreign currency by nonresidents.
  • Israel’s increased integration into international financial markets heightens the importance of an economic policy that aims at adopting international standards.

    The Annual Report for 1999 of the Controller of Foreign Exchange, which appeared today, describes and analyzes economic activity connected with nonresidents (in local and foreign currency, in Israel and abroad), as well as developments in the NIS/foreign-currency market and in assets and liabilities denominated in and indexed to foreign currency.

    The main points of the report are as follows:

    During 1999, which began in the shadow of the global financial crisis and of shocks to the NIS/foreign-currency market in the last few months of 1998, there was a turnaround as regards capital inflow and the foreign-currency market. This was due inter alia to the influence of these events on foreign investors and Israeli residents.

    Net investments by nonresidents in shares of Israeli companies rose sharply in 1999, reaching a record level of $ 3.5 billion. This was the result of Israel’s comparative advantage for foreign investors in the context of growing world eagerness to invest in high-tech companies, reflected in steep increases in this industry’s share prices abroad. In addition, foreign investors’ assessments of the yield and risk involved in investing in Israel, in light of the effects of the global financial crisis of the end of 1998 and recovery from it, also served to increase their investment in Israel. Note that the demand for investment in high-tech companies caused Israeli companies to prefer to make share offerings abroad, leading to a sharp change in the composition of the portfolio of nonresident investors. Their investment in Israeli shares traded abroad increased while there were liquidations of shares traded in the Tel Aviv Stock Exchange (TASE). In 1999, as in previous years, nonresidents did not act on the basis of considerations connected with the interest-rate spread between the NIS and foreign currency, but rather from long-term investment considerations.

    The substantial rise in nonresidents’ investments in Israeli shares in 1999 has facilitated a change in the currency composition (NIS/foreign-currency) of the assets and liabilities of Israel’s private sector since November 1998. In contrast with previous years, in 1999 the non-banking private sector significantly reduced its exposure to local-currency depreciation by $ 4.7 billion, while making greater use of financial derivatives to hedge against exchange-rate risk. In 1999, too, this sector acted in the context of the narrowing NIS/foreign-currency interest-rate spread, doing so however when exchange-rate risk was higher than it had been earlier, although this has declined during the year. The public’s awareness and assessment of exchange-rate risk rose in that period as a result of the rapid local-currency depreciation in August through October 1998 and the absence of intervention in foreign-currency trading by the Bank of Israel.

    In 1999 the NIS/foreign-currency market was more efficient and responsive to market forces than in the past. During the year the exchange rate fluctuated moderately in both directions, with a decline in volatility compared with its peak at the end of 1998. Against the backdrop of these developments, in 1999 there was a match-not seen in previous years-between the non-banking private sector’s demand for foreign currency (in order to reduce its exposure to local-currency depreciation) and the supply of foreign currency by nonresidents as a result of their investment in Israel.

    In order to maximize the advantages deriving from Israel’s integration into the global economy while minimizing the attendant risks, it is more important than ever to adopt an economic policy that aims at attaining international standards, incorporating a monetary policy that takes into account the effect of developments in international markets in view of the uncertainty which exists in them and which could be reflected in volatility. Note in this connection that the persistence of foreign investment increases Israel’s sources of capital and greatly stimulates its development. In addition, in view of the process of convergence to a western level of inflation and the narrowing of the interest-rate spread, the persistence of investment contributes to stability in the foreign-currency market, improving the efficacy of monetary policy in its effort to attain the inflation target.

    The Report makes the following additional observations regarding Israel’s external assets and liabilities (international investment position, IIP):

    In 1999 Israel’s external liabilities-including shares held by nonresidents- increased by $ 25 billion, to stand at $ 99 billion. This was due to the flow of investment by nonresidents-$ 7.5 billion-and to changes in the value of total outstanding liabilities. At the same time, the trend of reducing Israel’s outstanding net external debt continued, and it stood at $ 11.1 billion, although the outstanding gross external debt rose by $ 3.2 billion.

    Since the US government guarantees extended to Israel for borrowing came to an end in 1998, in 1999 its total net borrowing abroad fell substantially. However, the government increased its net borrowing on its own credit in the capital markets abroad to $ 600 million.

    Nonresidents deposited a record amount-$ 2.4 billion- in Israeli banks in 1999, while at the same time residents of Israeli deposited a peak amount of $ 2.4 billion, originating in offerings abroad, in banks abroad.

    The rising trend of direct investments in Israel that began in 1994 persisted in 1999, and reached a crest of $ 2.2 billion.

    P.O.B. 780, Jerusalem 91007;
    tel: 972-2-6552712/3; fax: 972-2-6528812;

    This press release can be found at the Bank’s website:

    The entire report in Hebrew can be found at:

    Chapter 1 in English can be found at: