| Tomorrow (Friday) the consumer price index for the month of February will be published. The following are the inflationary forecasts (February 2002: +1.1%, March 2002: +0.8%, April 2002: +0.4%, the coming twelve months: +2.9%, the year 2000: +3,8%; this according to the Economic Department of Bank Hapoalim). Should the rate of exchange of the dollar remain at its present level it is possible that the Governor of the Bank of Israel will leave interest at its present level and not increase it at the end of the month (although the expectations are for an increase of interest of 0.3%- 0.5%). The American envoy Anthony Zinni will arrive today (Thursday) in Israel in order to try and calm the region. In addition, in the coming days the vice President of the U.S. Richard Cheney will tour the Middle East, in order to convince the Arab countries of the necessity to expand the war against terror. This week finally the real estate tax reform was approved (the Rabinowitz Committee Recommendations) and it is possible that this will slightly encourage activities in the real estate market. A number of new economic data were published this week in the U.S. (unemployment, retail sales and others) which showed the continued revival of the American economy and its return to growth. In the coming two weeks the publication of financial statements for the fourth quarter of 2001 will be completed, and also the end of the first quarter of 2002. It seems that the results of the statements for the fourth quarter combined with the expectations of the statements for the first quarter will affect the trend of trading in the near future. The rate of the dollar, which maintained its high level, will continue to assist the financial results of export companies. | During the past week a number of terrorist acts occurred and it seems that there is an additional escalation in the security situation in the region. In addition, the chances of an American attack against Iraq in about two months time have increased and this will increase the uncertainty in the security field. The demands to appoint a Council of Governors that will determine the rate of interest and take into account also the growth and unemployment targets are likely to harm the independence of the Governor of the Bank of Israel and to damage Israel’s credibility in international markets, which is likely to cause a weakening of the shekel. Although there are positive signs of increasing economic activity recently as a result of the reduction in interest, but only in the coming months will we be able to know if this relates to only a temporary improvement, or a change in direction of the Israeli economy. Due to the accumulated damage of the Intifada to the Israeli economy, the decline in the amounts of taxes collected and the expectations of lower growth than expected in the local economy, it seems that the government will find difficulty in meeting its budget deficit target (3% of GNP). If the government does not succeed in significantly increasing its revenues in 2002 the deficit will increase and it will force the government to carry out a further cut in its budget or to raise high amounts through bonds. In February we saw withdrawals of billion shekels from provident funds and further study funds. Data from the Bank of Israel show a sharp decline in investments of foreign residents in Israel 2001, concurrently with an increase in financial investments by Israeli’s abroad, which are likely to divert considerab;e funds from the Israeli capital market to overseas, should the security situation continue to worsen. The continued diversion of funds abroad by provident funds (up to 5% of their financial assets) and insurance companies (up to a limit of 20% of their financial assets) are likely to further reduce the level of interest in the local market. |