Growth is good, but not good enough
The Bank of Israel cites the impact of the social protest, debt restructurings, and the capital gains tax hike.
The social protest, numerous debt restructurings, and the capital gains tax hike to 25% as part of the Trajtenberg Committee recommendations, are partly responsible for the underperformance of Israel's stock market relative to world stock markets, states the Bank of Israel in the minutes of the monetary council meeting for March, which were published today.
This was the first time that the monetary council discussed the negative sentiment on the Tel Aviv Stock Exchange (TASE). According to the Bank of Israel, the rise in geopolitical risk in the region - Arab Spring and the Iranian threat - are factors behind the drop in the TASE. It notes that credit default swap (CDS) spreads have not widened.
Leading stock markets around the world have been rallying since the beginning of the year, rising by up to 20%, while Israeli investors have been disappointed as the Tel Aviv 25 Index lags behind with a gain of 2.2%.
"Committee members also discussed the extent to which the recent months' increase in geopolitical risk in the region affected the underperformance of Israel's stock market relative to world stock markets, the depreciation of the shekel against the dollar, and the exit of capital from Israel. Apparently, the changes observed can be attributed partially to additional factors in place in Israel recently as well, such as the impact of the social protest, numerous debt restructurings, and increased capital gains tax. With that, it was noted that there have not been widening CDS spreads, nor declines in tourist entries or investment," the minutes of the monetary council meeting state.
The monetary council also discussed the credit crunch, which contractors are complaining about against the backdrop of a 13% drop in housing starts in the fourth quarter of 2011. The Bank of Israel says that there is no credit crunch, despite the higher cost of credit.
"Both bank and non-bank credit continued to increase over recent months, although at a slow pace relative to recent years, and particularly at a slow pace compared with GDP growth," the minutes state. "In particular, there was a slowdown in credit extended to the real estate sector, in which increased risks led to tighter terms for granting credit to contractors. The tightening of the terms, at least at some banks, was unrelated to industry specific credit limitations on the construction industry that they face. Participants also discussed the difficulties in recycling debts on the capital market in light of the increase in corporate bond yields, primarily those of companies with medium to low credit ratings. These difficulties, seen in the survey of business trends as well, were mainly prevalent among real estate companies and small companies."
Published by Globes [online], Israel business news - www.globes-online.com - on March 12, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012
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