Avi Tiomkin: Israel will become like Turkey

The Israeli hedge fund advisor forecasts the collapse of the shekel, and 30% annual inflation, if the judicial overhaul goes ahead.

"The countdown until Israel's credit rating is cut has begun," Israeli hedge fund consultant Avi Tiomkin told "Globes" in January. Six weeks have since passed and the shekel has depreciated sharply against the dollar and Israeli government bond yields have risen steeply. At the same time the legal overhaul continues moving forward, there has been chaotically conducted budget discussions, and this week the administered territories are on fire. Tiomkin's scenario of a credit rating cut does not seem so far off.

But Tiomkin himself now talks of even more extreme scenarios. He now compares what is happening to the Israeli economy with Turkey, a country that in recent years has seen a collapse of its currency's exchange rate, and a dramatic jump in inflation. Turkey, according to Tiomkin, is the "ultimate equivalent" of Israel.

Tiomkin is interviewed by "Globes" in his Kfar Shmariyahu home. On the shelves are pictures of him with President Bill Clinton, President George W. Bush and Prime Minister Yitzhak Rabin. "In total I advised and was involved in funds worth close to $50 billion." This included consultancy to the managers of the Caxton Associates fund management company and the Brevan Howard fund management company. "My main involvement was in global economic processes. My major ability was to foresee significant changes of direction." And of course he identifies a moment like that today in Israel.

"Everybody makes a comparison with Hungary and Poland - and they are wrong"

"All the comparisons with Hungary and Poland fall short significantly," Tiomkin explains. "Both countries are members of the EU, and despite the pseudo-democratic regime, their dependence on aid from Brussels is dramatic, especially since Covid. Also, the regimes in Warsaw and Budapest have no religious dimension, or theocratic ambitions.

"The parallel example to us is Turkey, and that's why I say 'Turkey is here'," he says and details the similarities he finds between Israel and Turkey, as well as between the heads of state.

Before becoming Turkey's President in 2014, recalls Tiomkin, "Erdogan was a successful prime minister and gradually led Turkey from a low-point to  high economic status. In 2014 with his appointment as President he set out on a journey to take control of Turkey by exploiting a kind of one-day military coup (in 2016), while abandoning secularism, undermining democracy, mass layoffs in the army and police, firing judges and strengthening government bureaucracy." Tiomkin recounts that executive power was focused in the hands of Erdogan as President.

"Of course the results and consequences were dramatic. The currency depreciated from 4 Turkish lira to the US dollar to 19 today. Almost a fifth of the value. Annual inflation rose from 8% to 90%. Bond ratings fell to junk bonds and long-term interest rates rose from 6% to 24%. Prime rates reached a peak of 25%. Turkey's foreign exchange reserves fell from $150 billion to almost zero."

He continues, "Almost all the media, economists, experts and commentators have fallen in love with the comparison with Poland and Hungary. But in practice this is not true. If the rush to a coup d'état is not stopped, the economic blow we are about to take will be severe and irreversible. And here are my predictions: the shekel exchange rate will reach between NIS 7 and 10 to the dollar. Inflation of at least 30%. Interest between 10% and 15%. Loss of Israel's foreign exchange reserves. Downgrade to junk bond rating. And restrictions on transferring capital abroad.

"There is no doubt that Israel is seeing an attack on the shekel, both by foreign investors and by speculative parties, but the most dangerous factor is that the local population will start leaving. There is no force that can withstand this," says Tiomkin. He also explains that central banks that try to support the domestic currency exchange rate create buying opportunities for investors who want to bet against them. The result is a "rapid loss of foreign exchange reserves." And beyond Turkey, Tiomkin points to a series of other examples in which the local currency registered a sharp depreciation, including Thailand, India, and Russia.

"The Bank of Israel, in my opinion, understands this. Of course, all these processes will lead to a very deep recession in Israel, and a wave of significant unemployment. 10%, 20%, you name it. This is a type of crisis that is so deep in the sense that all the concepts we grew up with are going to be completely overturned."

To all this Tiomkin also adds Israel's exit from the WGBI global bond index, and a danger to the stability of the banking system. "Complete transparency," he adds, "I have no speculative position regarding the shekel, period. I already sold all my holdings in State of Israel Bonds in January, when I said here we are starting a process that could mean a downgrade."

You stipulate very specific numbers. How do you calculate them?

"I took the other currencies and related to what happens when there is a crisis of confidence within the population in the currency, and when there is public withdrawal from the currency and the financial investments of that country, and I extrapolated. It is clear that this is not an exact science and you cannot make graphs, and between us, what does it matter if it is 6.5 (shekels to the dollar) or 7.5, or 9, or maybe more".

And you talk about 30% inflation?

"Again it's a type of extrapolation. My assessment is this: if the currency depreciates by tens of percent or 100%, the effects on imported products will be dramatic, and then the impact on all business activity in Israel will be such that it will accelerate the inflationary process, which to a certain extent already exists today - we are at 5% (inflation).

"You have to remember that in processes of this type, until it happens it takes longer than you think. And when it happens, it happens much faster than you think. It is much more difficult to get from 1% to 4%, than from 4% to 20%. This reality has happened in other countries."

Erdogan, Tiomkin says, replaced one central bank governor after another and even appointed his son-in-law as minister of finance. In Israel too he identifies a dynamic of appointing 'our people' like the idea that was examined of appointing Prime Minister's Office director general Yossi Shelly as acting head of the Central Bureau of Statistics.

He contemptuously dismisses Netanyahu's promises to maintain the sanctity of the Bank of Israel's independence.

"Foreign investors know what happened in Turkey

When the Bank of Israel Governor told the cabinet last week that markets can behave in a non-linear way, and the Ministry of Finance chief economist said that a snowball can form, how do you interpret these comments?

"I interpreted them in numbers. They have official positions and cannot say this. They don't want to be blamed for the process itself. But severe warnings like these from office holders I do not remember ever being heard in Israel since Yigal Horowitz (Minister of Finance) used to say 'get down from the roof you crazies' (in 1979).

Tiomkin, who in the past has harshly criticized the Bank of Israel, and also received criticism back from the bank, now compliments Governor Prof. Amir Yaron. "He turns up, speaks, expresses himself and convenes the emergency committee" - Tiomkin refers to the committee for financial stability, which the governor convened for a rare meeting last week. "I wasn't a big fan of his and he wasn't of me either. But he acts very wisely and very cautiously. I'm sure he doesn't sleep at night because he's on the front line."

You've described results that we could reach. What sort of timescale are we talking about?

"If the coup d'etat process, which is taking place before us, is realized - this process will happen in no longer than the next year or two."

What is the likelihood of this scenario being realized?

"100%. Absolute certainty. There is no way that this would not happen if the current process is not halted."

Let's assume it is halted now, and a committee to find a broad consensus is set up that sits for a year. Where does that put us in economic terms?

"There would still be enormous volatility in the financial markets and the process of weakening that I have spoken about would continue, not in such an aggressive way but more slowly. The same regarding the cut in ratings, depreciation of the currency, rise in interest rates and regarding economic activity. The base will be harmed and the model that says Israel will be broken. It must not be."

You are focusing on financial expenditure of Israelis, which is a dramatic process. But you can you explain to me how foreign investors will be thinking?

"Foreign investors know what happened in Turkey. What happened in the Asian crisis. Foreign investors hear the voices from here and understand this type of process. Look at the headlines in the New York Times and Wall Street Journal on how the Start-Up Nation is in danger. They say to themselves 'in terms of risk/opportunity, why should I take the risk?'. Add to that the fact that the whole world is in a process of recession and moderating economic activity - and then they say to themselves 'Why do I have to be here? Why should I keep my money here? What will I explain to my board if, God forbid, something happens?"

"Already today, there is no doubt that S&P, Moody's and Fitch are having emergency meetings about what to do in terms of downgrading. It may be that the first reading (of the Knesset judicial reform bill) will be enough for them, it may be that they need more things to happen, but there is no doubt that the sharp words of people like Jacob Frenkel, Karnit Flug , Zvi Eckstein, Larry Summers, Nouriel Roubini, create a situation that you cannot ignore. As soon as The Economist and the FT, and the New York Times, as well as the Wall Street Journal, which is a right-wing pro-Israel newspaper, put a picture of a demonstration on the front page - this means that the focus on Israel is now becoming something central."

"I don't remember warning from senior figures like we have now"

You mention Frenkel and Flug. Did they do the right thing?

"Obviously. It's like if you are the chief of staff or hold a senior position - you are shirking your duty and your national responsibility if you don't present things in all their severity. Especially when they were governors of the Bank of Israel for such a long period of time and have such a high international status, and there is no disputing their professionalism in the field. And it is a fact that they felt this need. It shows how deep down the understanding of what is happening has penetrated."

On the one hand you analyze the situation as you see it. On the other hand, I assume that you don't want a run on the banks, and don't want to contribute to the dynamics that you describe?

"If I say this with such certainty, it is not because I created it but because the process is happening anyway - whether I'm here or not. They'll say Tiomkin with his prophesies about the clock being broken. They said it about me in 2008, during the euro crisis, I'm already used to it. We are talking about processes already taking place. The shekel is at NIS 3.68/$. Rating agencies are discussing the situation. I didn't invent Turkey."

I understand that you are an individual who cannot influence global macroeconomics but we are talking about mass psychology and you can contribute to that?

"In that context the effect of Frenkel is 100 times stronger." In addition to being Bank of Israel Governor, Frenkel held key positions in Wall Street and the G30. "And so I very much respect and value what he did."

Standing behind his forecast despite past errors

Tiomkin is proud of the forecasting ability that he has demonstrated over the years, although as he also admits, not all of his predictions have always been correct. I dwell on one specific forecast, which he spoke about to "Globes" about six months ago, in which he predicted that already at this stage the US would be in recession, and the Fed would have cut interest rates. In practice, inflation in the US is higher than forecasts, and it seems that more interest rate hikes are on the way. "The inflationary process is on a very clear downward trajectory below," Tiomkin answers when I ask him how confident he is in his predictions, and mentions the declines in the real estate and automobile markets, and the tech layoffs. "It's happening, a little more slowly. And don't forget that until March last year money was still being injected in, and the interest rate was still zero. When the factor in the classic models is a year to 18 months (until the interest rate starts to have an effect), in my opinion, within two to three months the annual inflation rate will be 3%. We are already seeing a collapse in rents in New York."

"In my eyes it's a tragedy and many people will be hurt

You mentioned that you have sold your bonds

"I put my money where my mouth is"

Ordinary people do not have bond portfolios that they can sell. Most of their capital is in pension funds and their apartments. It's very difficult to protect yourself.

"This is a terrible tragedy because the real results of what is happening will be social unrest. It won't be related to demonstrating for or against. It will be the result of mass layoffs, harm to savings portfolios. That is the tragedy of the matter that many people will be harmed and their ability to cope and protect themselves is very small."

Are people in the business and financial community in Israel speaking out enough?

"It is getting stronger because the understanding of the enormity of the tragedy that can happen here is beginning to trickle down to them. It is difficult at the beginning to be the flag bearer, even if you see or think things.

"And another thing - and I don't judge them, and they shouldn't be judged - there are many business owners who understand what's going on, but their dependence on the government or their dependence on public bodies is very great, so what they express privately they won't express openly."

Published by Globes, Israel business news - en.globes.co.il - on February 28, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

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