30.01.02

Transactions in the Financial Account and the NIS/FX Market:
Main Developments in December 2001

 

A. Transactions on the financial account

Nonresidents’ investment in Israel in December 2001 amounted to $ 277 million, as a result of the rise in deposits of foreign banks, which amounted to $ 414 million. This item is naturally volatile, and flows in it derive from liquidity and short-term commercial considerations. As in the previous two months, in December, too, there were withdrawals from nonresidents’ deposits, and these amounted to $ 51 million. Direct investment was $ 52 million, similar to its level in recent months. Portfolio investment sales continued, and amounted to $ 120 million, half on the Tel Aviv Stock Exchange and half on the secondary market abroad.

Residents’ investment abroad amounted to $ 174 million in December 2001, most of it ($ 149 million) direct. The latter included two investments totaling $ 94 million; one of them involved investment by one of the major banks in a subsidiary abroad, and the other was in a company producing semiconductors.

B. NIS/FX market1

From the beginning of the month until the date of the interest-rate reduction the exchange rate remained essentially unchanged. When the 2 percentage-point reduction of the interest rate by was announced there was some adjustment of the public’s asset portfolio, as the NIS-dollar interest-rate differential narrowed to only 2.05 percentage points, and NIS depreciation began; by 9 January 2002 this had amounted to 4.5 percent and is at present 8 percent. Concurrently, the implied volatility in NIS/$ options rose significantly, from 5 percent to a peak of 8.5 percent. In January this volatility lessened somewhat, but is still greater than it was before the interest-rate cut.

In the period following the interest-rate cut, individuals constituted the dominant factor behind the demand for foreign exchange, and they accrued large amounts in the mutual funds specializing in foreign currency, whether in Israel or abroad. Individuals also bought foreign currency in the amount of $ 158 million for deposit in foreign-currency-indexed savings schemes, most of them for terms of 3-5 years; this savings channel had been dormant for a long time.

The business sector was relatively inactive, and there was virtually no repayment of foreign-currency credit taken from banks. This sector acted predominantly by means of forwards, though to a small extent and with no clear trend.

In the first few days after the interest-rate reduction nonresidents bought foreign currency to the amount of $ 339 million by means of forward transactions. They subsequently sold a substantial amount of these purchases. The turnover in foreign exchange was also relatively small in comparison with that of residents.

Note that at the end of December there was local-currency redemption of foreign-currency-indexed government bonds (Gilboa), and this amounted to $ 339 million, indicating some reduction in the supply of foreign currency by the government.

 

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1 Due to events in the NIS/FX market, the data in this section go up to 9 January 2002.