Assessing the implications of the declines in the capital market for the stability of the Israeli high-tech sector
The Bank of Israel has published an analysis by economists in the Research Department assessing the implications of the declines in the capital market for the stability of the Israeli high-tech sector.
The following are the main findings of the analysis, as well as a number of graphs from the work.
- In 2021, the valuations and capital raising of Israeli high-tech companies were much higher than the long-term trend, and a record number of Israeli companies held IPOs. During that year, demand for workers in high-tech continued to increase rapidly, and tax receipts from the industry were high.
- At the beginning of 2022, technology share indices in Israel and abroad dropped, and company valuations were cut. The number of sales of high-tech companies (mainly through IPOs) declined significantly. Capital raised in the first half of the year was higher than in most previous years, but lower than in 2021, and the slowdown is expected to continue.
- There was also a sharp decline in technology share prices during the dot-com crisis at the beginning of the century, which led to a prolonged negative impact on the high-tech sector. However, the Israeli high-tech sector is currently more mature and more diverse than it was then. Only 11 percent of those currently employed in the sector work for startup companies that are at the greatest risk of a hit to their operations due to a slowdown in capital raising.
- In the past two years (2020 and 2021), the NASDAQ index increased by exceptional rates of 28 percent (2020) and 40 percent (2021), but the output of the high-tech sector grew at quite a stable rate, averaging 6 percent per year. Due to the stability of high-tech growth in the past decade and the weakening of the link between the sector’s real and financial activity compared with the dot-com crisis, the likelihood that a decline in the markets will lead to an impact on the sector’s real activity of a similar magnitude to the beginning of the century is not high.
- In the short term, the real expression of financial developments is expected to include: (1) a decline in state revenue from taxes, mainly on income from the realization of capital gains; (2) a potential slowdown in hiring and a halt to wage increases among most firms; and (3) increased frequency of closures of firms with liquidity difficulties. The decline in the markets since the start of the year is expected to reduce foreign exchange conversions by domestic high-tech firms, and according to our estimate, the decline may reach about $700 million, or 0.16 percent of nominal GDP, compared to a situation in which the NASDAQ would remain at the peak reached at the end of 2021.
- Since Israeli high-tech in recent years has featured high demand for employees and a lack of skilled labor, it is likely that an adverse impact to employment among some firms in the sector would mainly be reflected in the transfer of employees to more stable firms, with less prolonged unemployment.
- In the medium term, insofar as global economic activity slows, there are two main risks to activity of the high-tech sector: (1) a decline in demand for the sector’s goods and services, due to a slowdown in economic growth and the dissipation of the increased demand resulting from the COVID-19 crisis; and (2) a slowdown in the sector’s growth due to a prolonged decline in the availability of capital, should technology share prices continue to decline.