Israel's Financial Account, 1998 to 2005
Yehiel Rehavi and Asher Weingarten
Abstract
In the years from 1998 to 2005 Israel's financial activity vis-à-vis abroad underwent significant changes. Israelis invested $ 68 billion abroad, and nonresidents invested $ 57 billion in Israel. Several developments contributed to this high level of activity: liberalization of the foreign exchange market which started in 1998 and which opened new possibilities for Israelis to raise capital abroad and to invest abroad; increased exposure of the economy to external factors, in keeping with increasing globalization that was expressed inter alia by increased capital flows to and from emerging markets; tax reform that reduced discrimination and distortion in the taxation of financial assets and that also contributed to increased investment abroad by Israelis. In addition to the above, Israel's industry underwent considerable structural changes, with the expansion of the high-tech sector to a leading position in the economy.
The composition of Israel's assets and liabilities portfolio underwent a significant change in the period surveyed. Capital flows into and from the economy rose faster than did Israel's GDP. Nonresident investment in equity and foreign direct investment in Israel rose rapidly. The proportion of tradable investment in the economy also grew to a certain extent.
The main effect of the greater exposure of Israel's economy to abroad was on the activity of the private nonbanking sector, which raised capital in financial markets abroad and became less dependent on the traditional financial intermediators such as the government and the domestic banks. As a result, the government's and the domestic banks' shares in Israel's total liabilities abroad declined, with a subsequent rise in the share of the private nonbanking sector. The increase of that sector's activity led to an impressive rise in its assets abroad as well, and this brought the economy from being a net debtor to abroad of some $ 15 billion at the end of 1997 to having a net assets surplus (debt instruments) of $ 23 billion at the end of 2005.
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