To full report (Hebre​w)​

The annual report on the investment of Israel’s foreign exchange
reserves for 2016 was published today.[1] Following
are the main points in the report:


 ·       Israel’s foreign exchange
reserves totaled $98.4 billion at the end of 2016, an increase of $8 billion over
the course of the year. Bank of Israel purchases, totaling $6 billion, were the
main factor in the increase.


 ·      At the end of 2016, the
level of reserves—the equivalent of about 30 percent of GDP—is within the range
of the appropriate level of reserves as set by the Governor, of $70–110 billion
(21–34 percent of GDP). As a share of GDP, the reserves increased this year by
one percentage point compared with 2015.


 ·     In 2016, the holding rate
of return on the reserves was 1.56 percent in terms of the numeraire, which is a
basket of currencies—primarily comprised of the dollar and euro. The rate of
return is similar to the average return since the global crisis, and greater
than the average return over the past three years of 1.16 percent.


 ·     The ability to achieve a
relatively high return, despite the negative return on a considerable portion
of bonds issued by major European countries, in which about one-third of the
reserves are invested, is the result of a long term process, in which the share
of reserves invested in risk assets—equities and corporate bonds—was gradually

 ·    In 2016, the reserves
portfolio benefited from the continued strong performance of equity markets in the
investment countries. Due to the strong markets, active management—the
investment’s actual deviation from the numeraire benchmark—contributed 135
basis points this year, the largest contribution in the past decade.


 ·   The percentage of risk
assets in the reserves portfolio was increased this year as well: actual investment
in equities increased to 10 percent, from 9.2 percent, and actual investment in
corporate bonds increased to 4.8 percent, from 4.6 percent. Despite the
increased percentage of risk assets, the reserves portfolio’s level of volatility
was similar this year to its volatility in the previous year. This was due to a
decline of volatility in markets, against the background of excess liquidity in
them and due to a negative correlation between the duration premium and the
equity premium.


 ·      The maximum permitted
allocations in equities and corporate bonds were revised within the framework
of the investment policy guidelines, with the goal of increasing the flexibility
to manage the portfolio without changing the maximum permitted risk—the maximum
permitted investment in equities was increased from 12 to 15 percent, the
maximum permitted investment in corporate bonds was increased from 6 to 15
percent, and the maximum combined investment in equities and corporate bonds
was constrained to 25 percent of the reserves.


[1] The Hebrew version of
the report was published today. The English version will be available within
several weeks.