"The proposed public-private fund to purchase corporate bonds is welcome. It should be established promptly and tasked primarily to support new credit flows for large solvent firms.," says the IMF in its annual report on the Israeli economy submitted to Minister of Finance Ronnie Bar-On and Governor of the Bank of Israel Prof. Stanley Fischer today.
The IMF added, "In this light, purchases by the fund on the secondary market would generally be avoided. These will not provide new credit to firms, and they risk implicitly transferring accrued institutional investor or corporate losses to the budget. While plans should be prepared to address priorities in the corporate bond market other than credit flows, the tasks for this fund should not be extended lest its effectiveness and accountability is diluted. Given the terms of reference outlined here, the anticipated size of the fund -in the range of NIS 10-20 billion - is sufficient at least through 2009.
"The initiative to streamline procedures to reorganize corporate bonds is welcome. And any bureaucratic impediments to efficient and rapid disbursement of the NIS 230 million fund to support credit for small and medium size firms need to be removed."
Commenting on Israel's general economic situation, the IMF states, "Israel faces a period of economic weakness with marked downside risks. With investment and exports weak, our central scenario anticipates a decline in economic growth to 1.5% in 2009, with average inflation around 2%, all assuming implementation of policies recommended below. A modest recovery is projected for 2010. However, financial sector vulnerabilities abroad imply that risks are firmly to the downside, notwithstanding strong profiles for external amortization and short term external debt."
In order for the automatic stabilizers to function in 2009, the IMF advises adjusting the one-year ceiling on the deficit of 1% of GDP. "Building on recent proposals from the Ministry of Finance, one alternative could be to replace it with a formal commitment to reduce public debt to well below 60% of GDP during the middle years of the next decade. This objective would establish a buffer against shocks, including geopolitical developments."
The IMF also suggests that the annual cap of 1.7% on real spending growth "may also need to be amended." The IMF argues, "It permanently impedes efficient operation of fiscal stabilizers due to the accompanying 'one-year lagged correction mechanism' for inflation surprises. And it may be inconsistent with consensus medium-term spending aspirations. Instead, adoption of caps for three years ahead on annual nominal spending, excluding emergency outlays, has merit. This framework would be highly transparent, would improve the operation of fiscal stabilizers and would buttress monetary responses to inflation surprises. With appropriate parameters - reflecting the inflation target and trend growth - such nominal caps would support the credibility of the flexible debt target objective."
The IMF concludes, "Planning for contingencies needs to proceed further and urgently. If policy credibility, effective coordination, and clarity of objectives remain the standard which further initiatives have to meet, Israel will pass through this turbulence successfully. We wish you well in your efforts to do so."
Published by Globes [online], Israel business news - www.globes-online.com - on December 16, 2008
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