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The economic and financial background conditions |
During 2024, the positive trend in most equity and corporate bond indices continued, in view of the continued expansion of economic activity worldwide. As of the end of 2024, the level of inflation in the major blocs remains higher than central banks’ inflation targets. This level is expected to lead, in some advanced economies, to a slowing in the pace of interest rate reductions. Alongside these factors, markets were also impacted by an increase in geopolitical risk and a rise in political uncertainty in several major countries.
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The level of the foreign exchange reserves and source of their change |
In 2024, the foreign exchange reserves increased by $9.9 billion, to a total of $214.6 billion. This increase derived mainly from capital gains on equity holdings and interest income from bond holdings.
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The asset allocation of the foreign exchange reserves |
As of the end of 2024, the asset allocation of the foreign exchange reserves was 67 percent in government bonds and other bonds[1], 23 percent in equities, and 10 percent in corporate bonds. |
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The return on the foreign exchange reserves portfolio in terms of the currency benchmark |
The rate of return of the reserves portfolio in terms of the currency benchmark[2] was 6.7 percent in 2024.
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Table 1a The rate of return on the foreign exchange reserves portfolio, annual and multiyear average, in terms of the currency benchmark (Percent, annual terms)
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The risk level of the foreign exchange reserves portfolio |
The volatility of the reserves, which reflects their risk level, moderated slightly and was impacted by, among other things, the decline in volatility in the equity and bond markets.
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The return on the foreign exchange reserves portfolio in shekel terms |
The rate of return in 2024 on the foreign exchange reserves portfolio in shekel terms was 4.8 percent, due to the strengthening of the shekel by 1.8 percent. |
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Table 1b The rate of return on the foreign exchange reserves portfolio, annual and multiyear average, in shekel terms (Percent, annual terms)
*A negative sign in the change of the exchange rate indicates the shekel's appreciation.
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Revision of the appropriate level of the foreign exchange reserves |
In 2015, the appropriate level of the foreign exchange reserves was set at a range of $70–110 billion. This level represented the foreign currency needs of the economy in an emergency. Since then, the Israeli economy and the main financial aggregates in the banking system, the capital market, and the foreign exchange market have grown markedly, and these are a main factor in calculating the appropriate level. They include the public’s asset portfolio that has almost doubled, an increase of over four times in foreign exchange market trading volume, and doubling of the value of nonresidents’ holdings in the domestic capital market. Alongside these, geopolitical risks have increased since the determination of the appropriate level of the reserves, and therefore so have the assessments of the government’s foreign exchange needs in times of emergency. These developments led to a renewed examination of the appropriate level, and it was revised upward accordingly, to a range of $130–170 billion.
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[1] Includes deposits and current accounts in central banks, in which the implied risk level is equal to the risk of the country as implied in government bonds, investment in debt instruments issued by multinational issuers and public sector issuers, as well as government bonds denominated in a currency other than the domestic currency of the issuing country.
[2] Information on the currency benchmark appears below in Chapter B.