After passing the two-year budget in July 2009, Minister of Finance Yuval Steinitz ought to have been able to relax in January 2010, but that he doesn’t have any such plans. Two weeks after selling 5% of Israel Discount Bank (TASE: DSCT), says Steinitz in interview with "Globes" that the government might sell its remaining 11% holding in Bank Leumi (TASE: LUMI) before a new chairman is elected at the bank.
If the government announces the sale of its stake in Bank Leumi before chairman Eitan Raff leaves in May, it will be a whole new ball game. Steinitz said, "It's not impossible, but I won't set a date."
"Globes": What does a date depend on?
Steinitz: "I have decided that, after the matter had been dragged out 25 years, in 2010 I will put an end to the state's holdings in the banks. The privatization of both Discount Bank and Bank Leumi will be completed by the end of 2010. I won't go into the question of who will be chairman of Bank Leumi."
Some of the candidates for Bank Leumi directorships have political affiliations. Can you live in peace with that? What about the possibility that someone with political affiliations will be elected chairman, assuming that the state does not sell its remaining shares in the bank by the time a new chairman is chosen?
"I won't comment on that, I won't name names, and I won't comment about Bank Leumi's current chairman or the next one. Last May, I thought it right to extend Raff's term because there was a leadership crisis at the time at Bank Hapoalim (TASE: POLI) and I thought that there shouldn’t be shocks at the two big banks."
Last Thursday, Steinitz and two of his aides left for a weeklong visit to the US and Canada. He will attend the Development Corporation for Israel/State of Israel Bonds annual conference and meet senior Canadian government officials and US businesspeople. Immediately upon his return, he is scheduled to meet Prime Minister Benjamin Netanyahu to decide on another term for Governor of the Bank of Israel Prof. Stanley Fischer. Steinitz says that the decision will be a joint one.
Asked about his tense relations with Fischer, Steinitz smiles and plays with a small ball on his desk, a gift from a visit by Ministry of Finance officials to the Bank of Israel. The ball contains 200,000 pieces of destroyed NIS 200 bills. As in every relationship, Steinitz says, "there are ups and downs. Now, I hope we're on an upswing. The governor put it quite nicely, when we said that we're like two doctors with one patient. The diagnosis or prognosis might be very different, but in the end, we have to work together."
During the past crisis, Fischer was perceived as the responsible adult who took care of the Israeli economy.
"We won't take that image away from him."
On housing prices
With apartment prices rising, there has been an inflation of proposals in the Knesset, tabled daily, aimed at lowering housing prices. Steinitz says that most of these bills will never make it through the legislative process, and says that some of them will actually cause apartment prices to rise further.
"The reasons for the rising prices in the housing market are the drop in the interest rate and mortgage interest rate. When the latter fell, it became more worthwhile to buy an apartment, and demand rose. Now, following the rise in prices, some people are saying that it's necessary to lower the interest rate in order to help homebuyers, but the direct outcome of an interest rate is not aid to homebuyers. On the contrary, prices rise, and even if you help with the interest rate, you affect apartment prices."
Steinitz explains that, in order to slow the rise in apartment prices, the Ministry of Finance is not seeking to boost already high demand, but is trying to increase the housing supply by greatly increasing the supply of land, and not only in the periphery.
"We'll soon begin to release land in central Israel, too. There are already plans, which will come into effect in two or three months," Steinitz says. "Some tenders have already been published, including for lots in Rosh Ha'Ayin, which is definitely a demand area on the edge of the Dan Region. We're talking about a large number of apartments, and there will other places, which I will not disclose now, because until a tender is published, it's a commercial secret."
Steinitz also reveals another part of his plan: reform in vacate-and-build projects, which will make it possible to build a large number of new apartments in old city centers. "Until now, this has been moving at a snail's pace because there are many bureaucratic hurdles, but I assume that it's a matter of a few months until significant reform in this sector emerges."
When will we begin to see a change in the graph of apartment prices?
"I can't commit to a date, because it depends on other factors, such as the general economic climate and the interest rate. In general, I think that the supply in the next two to three years will be so great throughout the country, and not only in the periphery, that we'll see prices fall. If we succeed in passing the vacate-and-build reform, it will also contribute. I believe that on this matter the government is acting on a large scale, but the effect will take time. There may already be an initial effect, because in the past couple of months we've seen the rise in prices slow down."
On the Bank of Israel's dollar purchases
In August 2009, the Bank of Israel announced that it was stopping it daily dollar purchases, after its foreign currency reserves reached the desired level. The Bank of Israel nevertheless added that it would make sporadic dollar purchases depending on circumstances. Steinitz has more than once said that the dollar purchases were a proper goal for the Bank of Israel, but recently, there have been rumors that the Ministry of Finance will shortly discuss a change in this policy.
Do you have any idea if and when it will be possible to get off the back of this tiger? Or should this policy continue?
"I have an idea, but I'm keeping it between me and Fischer."
Do you have an operative plan?
"We've talked about it. The amount of foreign currency that we want or are prepared to hold is kept very discrete. I think that, in general, the Bank of Israel has acted properly during the past crisis. When I took up this post, I gave full backing to the foreign currency market intervention, despite the problems."
Steinitz relates that, a month ago, he believed that toward mid-2010, there was a strong probability that the dollar would strengthen. "Despite all the pitfalls, I believe that the US economy will recover from the crisis more quickly than the European economy. I predicted that we'll see movement in favor of the strengthening of dollar against the euro. We may already be seeing signs of this in the past couple of weeks, sooner than I expected. I don’t rule out the possibility that the US interest rate will be raised, as we've already done. At that point, some of the pressure on the shekel will be eased.
"Nevertheless, it should be borne in mind that part of the shekel's strength is due to two other factors, which are 'rich man's problems'. One is the recovery in Israeli exports, a positive balance of trade, and a greater dollar inflow than outflow. The second is the improvement in Israel's economic image. Israel looks like a safe haven because we're considered an economy that weathered the crisis better, and emerged from it sooner, with fewer burdens on the future. To some extent, this encourages capital inflows. To some extent, these are problems caused by our relative success, as well as pressure on the dollar in general caused by the depreciation of the dollar in the US."
What about speculative movements?
"I don’t see them. What's a speculative movement?"
People who take a position. Short sellers.
"We don’t have any. I don’t see any organized attack in which 200 or 300 global speculators organize and decide to do something together. The Ministry of Finance and Bank of Israel agree that the main reasons are much simpler. The export-import balance is in our favor, and Israel is a safe haven. There's another point: Israeli companies and investors who were burned by their foreign investments, especially in real estate in Europe, Russia, and the US, are investing more heavily in Israel, bringing dollars into the country. This also creates pressure."
On narrowing social gaps
2009 opened with a GDP contraction of 3%, and ended with GDP growth of over 4% and a lower unemployment rate than in most Western countries. Steinitz believes that, by the end of 2010, the unemployment rate will return to its pre-crisis level.
"Our main task now is to exploit the advantages that are already present in the Israeli economy from before the crisis, in order to strengthen and accelerate growth, which will be quality growth, growth in high tech in the broad sense. High tech isn't just computers and know-how. High tech is also defense industries, agricultural industries, and medical devices, across a broad spectrum," says Steinitz.
In order to pursue Israel's high-tech success, the Ministry of Finance is undertaking measures to turn Tel Aviv into a financial center. "Not a financial center that will compete against London or New York, but as reinforcement," says Steinitz. Measures under consideration include regulations to encourage companies to set up branches or subsidiaries in Israel. The US-Israel Joint Economic Development Group recently began reviewing the future of high tech.
Steinitz says, "Our number one goal is to achieve rapid growth that is quality growth that will use Israel's economic strengths, as well as the advantages we're emerging with from the crisis, because even in terms of image the way Israel withstood the crisis, improved the image of the Israeli economy at the global level."
This time, Steinitz adds, "We must ensure that the growth will be growth that is not accompanied by a widening of social gaps, but by a narrowing of them. In the last growth cycle in 2004-08, there was growth but gaps widened."
Steinitz's comment is not a veiled criticism of Netanyahu's economic plan of 2003, when he was finance minister in Ariel Sharon's government. His view is that the previous round of growth widened social gaps, but everyone benefited. However, he admits that his plan "did not trickle down, at least not enough, to the poor."
Steinitz believes that the reform he announced last week, to reduce the number of illegal foreign workers will lead to growth accompanying a narrowing of gaps over the next five years. "If growth is accompanied by an influx of foreign workers into the flourishing country, this will be growth with widening gaps, because the rich will rise with the growth, but the poor will get competition from the influx of hundreds of thousands of workers who come to compete for jobs - cleaning and maintenance, cooking, and waitressing, driving, construction, and nursing."
You are aware of the argument that Israelis simply do want to work at certain jobs, and any plan you propose, whatever incentives you offer, and whatever restrictions you place on foreign workers, will not help.
"I think that that's just not true. All the experts at the government ministries and the Bank of Israel believe otherwise. If the jobs become available, for example as a housemaid, and salaries go up, more and more Israelis will take the jobs, and there will be Jewish and Arab housemaids."
On relations with Netanyahu
It is not possible to end an interview with Steinitz without asking him about his relations with Uber-Minister of Economic Affairs Benjamin Netanyahu. Last week, Hebrew daily "Ma'ariv" ran a headline that Netanyahu had reprimanded Steinitz for not improving the working relationship between the Israel Tax Authority and the Israel Police. Steinitz claimed that the so-called "reprimand" was in a letter he received from Netanyahu two months before. "It isn't clear to me who was behind reporting this now. I didn’t respond to this matter at the time," he says.
It appears that he had a need or interest in leaking this.
"I'm sure that it wasn’t the prime minister himself. Not everyone are well-wishers."
How do feel about the umbrella spread by the uber-minister over you?
"I feel quite good."
Doesn’t it emasculate you just a bit?
"The prime minister intervenes. It's natural for him to intervene, just as he intervenes in defense. No decision is taken without him."
But he isn't defined as the minister for defense affairs.
"The definition is irrelevant. What's important is the practice, and in practice, the prime minister intervenes in defense matters, and there is no defense decision that is not taken without his involvement, and he intervenes in foreign policy and decides what will be said to [US Special Envoy to the Middle East] George Mitchell, or whether we go to an international conference, and what measures we take, and what we won't do. That's his job as prime minister. He's allowed to do so, too, and he even has to intervene in economic matters. The degree of his intervention is very reasonable and the coordination between us is good. Without the prime minister's backing, for example, the two-year budget, the guarantees, and a range of other issues, would have been hard for me to pass. Our relations are good, even better than the average relationship between other finance ministers and prime ministers. We're friends, and sometimes disagree, or even bitterly argue, but the friendship and relationship between us is strong enough to withstand the arguments we've had and which we will have."
Published by Globes [online], Israel business news - www.globes-online.com - on February 1, 2010
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