Ministry of Finance Accountant General Yali Rothenberg talked to "Globes" deputy editor Dror Marmor at the "Globes" and Phoenix Investment Conference today about the management of Israel’s sovereign debt in a time of high and rising interest rates.
"The State of Israel has to raise debt all the time, both in order to grow and in order to keep going. This year we will need to raise NIS 100 billion. Israel’s debt stands at one trillion shekels. In recent years, we raised debt fairly easily, but how do you deal with the changing interest rate environment?" Marmor asked.
Rothenberg: "You have to draw a distinction between the interest rate environment and the rate of interest rate rises. 5% is not an environment that we haven’t dealt with in the past. There is also very good coverage for our offerings. The deficit has fallen dramatically. We raised NIS 265 billion in 2020, NIS 160 billion in 2021, and we had a surplus in 2022. On the other hand, the level of interest rates will clearly weigh on Israel over time. At the moment, there is a ratio of NIS 5.7 demand to every shekel we seek to raise."
In the previous Economic Arrangements Law, the designated bonds, which subsidized pensions through issues of government bonds at above-market interest rates, were abolished. According to Rothenberg, that will make things much easier for us. "Last year, we made a tectonic change in the management of the debt, with the ending of the designated bonds. That introduced a great deal of demand into our marketable debt offerings, because people want a portfolio that gives fixed income," he said.
"Our economy needs certainty"
"There’s an elephant in the room," Marmor said, "the legal system reform. The rating agencies have issued warnings, your colleagues at the Ministry of Finance and the Bank of Israel have issued warnings, the world looks on and likes us less."
Rothenberg: "We have to talk about certainty. Our economy needs certainty, and there’s movement towards certainty. What the rating agencies said was that we need to reach broad agreement. The president is promoting agreement, and I have positive expectations of that process."
Marmor: "The fluctuations in the exchange rate don’t agree with you."
Rothenberg: "There are fears and a rise in uncertainty, and there are basic processes taking place in the economy. The weakening of the shekel against the US dollar began in 2021 and gathered momentum this year. But in the past few days we have seen the shekel strengthening, because the degree of certainty has grown. Investors who look at the p/e ratios in the Israeli market are starting to return. The global economy is in a phase of adaptation to a high interest rate environment, which will remain for some time."
"Managing a low deficit?
Marmor: "When the Ministry of Finance Chief Economist has lowered her growth forecast, and S&P has lowered its growth forecast, how well do you sleep at night?"
Rothenberg: "Let’s look at it with a longer perspective. The Israeli economy grew by 15% in two years. The lower growth forecast, which is more in the direction of the long-term forecast of 2.5-2.7%, is real growth, not a recession. We’re in a high interest rate environment, we expect a decline in growth, because of the good, correct measures of the Bank of Israel to counter inflation. We are managing a low deficit, and revenues have risen 40% year-on-year. Now they will probably return to the trend line, and in real terms they will probably be lower, but the deficit is still low, at 1% to 1.5% of GDP. We are working in a low deficit environment that corresponds with the high interest rate environment."
Marmor: "But to what extent do our growth challenges oblige us to spend more? How frustrating do you find it that the government of Israel expends billions not on growth engines but on sectoral interests?"
Rothenberg: "Israel has large gap in its infrastructure stock in comparison with the OECD, and this happens when natural population growth is high. We have a good opportunity for investing in infrastructure: desalination plants in the Western Galilee, power plants in Dimona, waste treatment, in which we lag behind the world. We’re doing the Metro, the light rail in Jerusalem - and all this is being carried out through financial institutions, the banks and the private sector."
Marmor: "So the finance is to come from the private sector on the PPP method? The launch of the Tel Aviv light rail keeps being postponed. That started in the private sector, and it was decided to take it back into the government."
Rothenberg: "What’s right to do through the private sector, we’ll do that way, and what’s right to do through the budget, we’ll do that way. The Metro is 50%-50%. What the public sector does is growth too. It’s employment, contractors, money that the government injects into the economy through investment."
Marmor: "Still, money is being poured out in places that do not generate growth."
Rothenberg: "I’m the last person to want to invest the marginal shekel raised in taxes collected from each one of us in places that do not generate product or an adequate return. That’s how it works, we’re a democratic country, there are coalition negotiations, and these are the decisions made at the political level. I tell that straight to everyone."
The Investment Conference is in collaboration with The Phoenix Holdings and is sponsored by Strauss Group.
Published by Globes, Israel business news - en.globes.co.il - on June 14, 2023.
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