"The global economy faces the risk of an international financial crisis. Nevertheless, the Israeli economy is well prepared to cope with international financial shocks," Bank Hapoalim chief economist Prof. Leonardo Leiderman said today.
Leiderman made his remarks in a lecture entitled "The US Economy, Global Markets and Israel: An Updated Outlook" at the Israel-America Chamber of Commerce.
The reason for Leiderman's pessimistic prophecy is the lack of balance in the global economy. Leiderman: "The main concern is the huge US balance of payments deficit, which is expected to pass the $700 billion mark, or 6% of GDP, this year.
"This deficit mainly reflects a fall in the American rate of savings since 2000, including the development of a fiscal deficit, amounting to 4.4% of GDP. The main reason for this is the low real interest rate in the US. The real short-term rate is currently zero, while the annual inflation rate in the US is 2.7%. The US and the world are headed towards higher interest rates. The pace and timing of the rises represent important uncertainty factors."
According to Leiderman, the situation today is that the US depends on the rest of the world to finance its balance of payments deficit, and it requires the purchase of dollar assets to the tune of $2.6 billion every business day to prevent international financial stability being undermined.
The key to remedying the lack of global balance lies, according to Leiderman, in a combination of factors: reducing the US fiscal deficit, raising the US national saving rate, restoring short-term US interest rates to a "normal" level of 2%, floating of East Asian currencies and revaluation of those currencies, a rise in aggregate demand in Europe and Japan.
"Getting the global market back in balance requires coordinated action by US, European, and Asian leaders. At the moment, there is no progress in this direction. This gives rise to uncertainty and much anxiety on the financial markets," Leiderman said.
He said the Israeli economy was well prepared to cope with international financial shocks. "The fact that the shekel is a floating currency, together with monetary discipline and the US loan guarantees, and the optimism about the peace process, contribute to the economy's robustness," Leiderman said.
According to Leiderman, the rating agencies can be expected to upgrade Israel's sovereign rating, thanks to the economy's performance, the diplomatic process, and also because of Stanley |Fischer's appointment as Governor of the Bank of Israel, which contributes to the credibility of economic policy in Israel. He said he believed that the emphasis on meeting the government's inflation target would remain at the Bank of Israel under Fischer.
Published by Globes [online], Israel business news - www.globes.co.il - on May 3, 2005