Full presentation (Hebrew)
The Deputy Governor explained that the foreign exchange reserves managed at the Bank of Israel serve as a “safety buffer” for the economy in emergencies, and are expected to diminish the adverse impact of a possible economic crisis and reduce the probability that such a crisis would occur. In addition, they reduce the State of Israel’s risk premium and positively impact on its credit rating.
The Deputy Governor described how the appropriate level of foreign exchange reserves is established. By law, the Monetary Committee, with the approval of the Minister of Finance, may revise the principles by which the Governor determines the desired long-term level of the reserves. The principles are based on an integrated approach that takes into account the international standards and an estimation of possible uses of the reserves, with consideration of Israel’s unique situation. The principles were formulated over the course of the years, and a principles document was approved in 2012. In 2015, the Governor updated the appropriate level to a range of $70–110 billion. In addition, the Bank of Israel has the authority to purchase or sell foreign currency, as one of its available tools of monetary policy.
Since 2010, there has been an increase in the foreign exchange reserves from $60 billion to $111 billion at the end of September 2017. The ratio of reserves to GDP remained stable and in recent years has increased only moderately. In an international comparison, it can be seen that in small open economies that are comparable to Israel, there has been an increase in foreign exchange reserves in recent years, and in some of them there was even a sharp increase in the ratio of reserves to GDP.
The Deputy Governor’s address further referred to the manner of managing the foreign exchange reserves, with the three main goals being: maintaining their purchasing power, preserving a high level of liquidity, and achieving an appropriate return that covers the financing cost. To that end, the Bank of Israel diversifies the investments among different countries and different asset types while maintaining the level of risk set by the Monetary Committee. The increase in scope of the foreign exchange reserves and the decline in yields worldwide led to their diversification across a range of assets. In addition, the trend of diversification among asset types is seen at central banks around the world. Since the decision was made to purchase equities within the framework of managing the foreign exchange reserves, they have made a positive contribution to the portfolio’s return.
In conclusion, the management policy of the Bank of Israel’s foreign exchange reserves is not the same as the policy for managing another portfolio, due to the unique characteristics of the foreign exchange reserves and the purposes they are designated to serve. The increase in the reserves portfolio made it possible to concede some liquidity, to some extent, and to increase the share of risk assets in the portfolio. This process was carried out gradually and cautiously, and earned the Bank of Israel the “Reserve Manager of the Year 2017” award from Central Banking magazine. As a result of the change in the composition of the portfolio, in recent years the yield on the reserves has been higher than the Bank of Israel’s interest payments.