17.06.03

Israel's International Investment Position (IIP) and External Debt


Ø

Israel has become a net external creditor; the balance of its net (debt instrument) assets abroad was $ 6 billion at end-March 2003.

The Foreign Exchange Activity Department of the Bank of Israel published Israel's International Investment Position (IIP) to the end of March 2003 on the Bank's website, and updated the data dating from end-1998.

The data show that Israel's net foreign liabilities (liabilities to abroad less assets abroad) amounted to $ 25 billion-a decline of $ 0.8 billion in the first quarter of 2003 (henceforth, the period reviewed). This development expresses net capital exports of $ 1.2 billion during this period.

The Foreign Exchange Activity Department also reported that as a result of the updating of the data on the debt balance to end-2002, the net outstanding foreign debt became negative, so that in effect there was a net asset surplus, which even grew during the period reviewed. At the end of March 2003 this was $ 6 billion, and Israel became a net external creditor. The updating of data focused on the nonbanking private sector: the balance of deposits abroad and net commercial credit of the diamond industry.

The data also indicate that the short-term asset surplus (short-term assets less short-term debt) stood at $ 28 billion at the end of March 2003-up by $ 3 billion over end-2002. This was because the national debt, especially the government debt, is long term while assets-the Bank of Israel's foreign-exchange reserves and deposits abroad-are short term.

Israel's International Investment Position and External Debt, March 2003

IIP Report

The balance of Israel's net liabilities vis-א-vis abroad (balance of nonresidents' assets in Israel less the balance of residents' assets abroad) amounted to $ 25 billion at end-March 2003-down by $ 0.8 billion in 2003:I.

Israel's asset balance abroad was $ 80 billion at end-March 2003, up by $ 1.3 billion during the period reviewed. Most of the increase was in debt instruments and stemmed from a rise in deposits of the private sector-both banking and nonbanking-in banks abroad.

During the period reviewed Israeli banks increased the extent of their deposits abroad to $ 1.3 billion, for reasons of liquidity management. Most of the sources for this were withdrawals from their deposits with the Bank of Israel, as a result of a change in the liquidity requirements regarding secondary liquidity.

In the nonbanking private sector, the trend of transferring deposits abroad moderated in the period reviewed, and total deposits rose by $ 0.3 billion to stand at $ 12 billion. Most of the activity derived from the deposits of Israeli banking corporations abroad, while households-who were more active in this channel in 2002 and increased their deposit balance by $ 1.1 billion-were not responsible for net transfers to abroad in the period reviewed.

The outstanding external asset balance of the public sector was $ 24 billion at end-March 2003-a $ 0.4 billion decline during the period reviewed. This expresses the reduction of deposits of Israeli banks with the Bank of Israel, as a result of changes in the liquidity requirements, which was offset by the receipt of the second tranche of civilian aid, as well as by price changes and exchange-rate differentials.

Israel's outstanding foreign liabilities (i.e., the balance of nonresidents' assets in Israel) amounted to $ 105 billion at end-March 2003-an increase of $ 0.6 billion during the period reviewed. Most of the change was due to a change in the price of Israeli shares held by nonresidents, and to exchange-rate differentials.

The balance of direct investment in Israel by nonresidents was $ 26 billion-a rise of about $ 1 billion in the period reviewed. The rise was largely the result of nonresidents' holdings of nontraded shares, an increase in accrued profits, price shifts, and exchange-rate differentials.

The balance of nonresidents' portfolio investment amounted to $ 33 billion. The balance of traded shares rose by $ 1 billion, mainly due to the change in share prices and to exchange-rate differentials. Nonresidents' holdings of Israeli bonds dipped by $ 0.4 billion. Of the bonds traded in Israel, there were purchases amounting to $ 0.2 billion of Shahar bonds and T-bills by a few foreign financial institutions which was offset by redemptions of bonds traded abroad by the government of Israel, as well as by debt forgiveness of corporate bonds.

The balance of nonresidents' other investments in Israel amounted to $ 46.4 billion at end-March 2003, $ 24 billion of which were nonresidents' deposits with Israel's banking system. During the period reviewed, the trend of net withdrawals from these deposits continued, and amounted to $ 0.8 billion.

External debt

Israel's net external debt declined by $ 2.6 billion in the period reviewed, due to the reduction in the gross external debt and rise in assets (debt instruments) abroad-a trend in evidence for several years. As a result, in the course of 2002 Israel became a net external creditor. At end-March 2003 Israel's net asset balance (debt instruments) was $ 6 billion. External debt is a very important factor in the analysis of Israel's financial strength, as changes in the composition of the external debt and assets abroad constitute an indication of changes in Israel's credit risk. Thus, inter alia, international rating agencies incorporate data regarding the composition of and changes in the external debt in their indicators of a country's credit risk. In this respect short-term net external debt is of special significance. Total short-term assets were significantly higher than total short-term debt in the period reviewed. Surplus short-term assets amounted to $ 28 billion at end-March 2003-up by $ 3 billion over end-2002. This is because Israel's debt, especially government debt, is long term, while assets-the Bank of Israel's foreign-exchange reserves and deposits abroad-are short term. The structure of short-term external debt and short-term external assets is very important for assessing the economy's financial strength and ability to repay its debts. A high level of surplus assets ensures the ability to repay short-term debt at a time of external financial shocks.

Outstanding gross external debt was $ 66 billion at end-March-a decline of $ 1.2 billion over end-2002. All the change was in the private (banking and nonbanking) sector.

The balance of external assets (debt instruments) amounted to $ 72 billion at end-March-an increase of $ 1.4 billion over end-2002. The rising trend in Israel's assets abroad (debt instruments) has continued for several years. Most of the increase stemmed from the activity of the private (banking and nonbanking) sector, and was concentrated in the deposits of residents in banks abroad and customer credit of Israeli exporters.The nonbanking private sector's external assets (debt instruments) reached a peak of $ 32 billion at the end of March.
​