The annual report on the investment of Israel's foreign exchange reserves for 2015 was published today. Following are the main points in the report:
· Israel's foreign exchange reserves totaled $90.6 billion[1] at the end of 2015, an increase of $4.5 billion over the course of the year.
· In 2015, the Bank of Israel purchased $8.8 billion. Approximately two-thirds of the sum were purchased within the framework of the Bank of Israel’s intervention intended to moderate exchange rate volatility that is not in line with fundamental economic conditions in Israel, and the other third was purchased within the framework of implementing the plan to moderate the effect of natural gas production on the exchange rate. The increase in the reserves through the purchases was offset by about $3 billion as a result of the strengthening of the dollar against the euro.
· In recent years, in order to attain a higher long-term yield on the reserves, the share of risk components in the portfolio was increased, subject to the desired risk level and while adhering to the two principles guiding the reserves holdings—maintaining their purchasing power and managing them with a high level of liquidity. Accordingly, the share of investment in equities increased from 8.2 percent to 9.2 percent, and it was allocated to additional equity markets. In addition, the share of investment in corporate bonds was increased from 0.9 percent to 4.6 percent.
· In 2015, the slowing in the real economy continued, primarily in emerging economies. Advanced economies were relatively stable. The market assessment that the US federal funds rate would be raised in the beginning of the year did not materialize and the rate was only increased at the end of the year. In contrast, other major markets further enhanced their accommodative monetary policy. As a result, yields to maturity of government bonds in the investment countries reached historic lows, and in Europe they declined to levels even more negative than before.
· Against this background, the holding rate of return on the reserves, in terms of the numeraire[2], was low relative to previous years, reaching 0.64 percent, while the benchmark return was 0.1 percent.
· The difference between the holding rate of return on the reserves and that of the benchmark, which is risk-free, was 0.54 percent. This contribution is attributed mainly to the duration and diversification of the portfolio relative to the benchmark, and to investment in equities.
· Since 2012, the investment in equities has generated a significant contribution to the return on the reserves portfolio. This trend continued this year, although the contribution was low relative to previous years. The investment was characterized by high volatility, mainly in the second half of the year, among other things against the background of increased concerns over a sharp decline in the rate of growth in China.
To Full Report
[1] Throughout the report, the level of the reserves includes allocations of Special Drawing Rights by the International Monetary Fund to member countries (SDR Allocation) and Israel's balance in the Reserve Tranche of the Fund. At the end of 2015 these totaled $1.6 billion. For more on this issue, see the Bank of Israel's Financial Statements for 2015.
[2] The numeraire is a currency basket in which the foreign exchange reserves are measured. See Chapter 1, Section 3 in the report.