Israel as a safe haven for emerging markets..

Bank of Israel Governor at Jackson Hole conference reviewed the Israel economy. He points how it had become a safe haven of sorts due to its stability.

Israel is an interesting case study. We are a relatively strong small open economy that is obviously also influenced by external shocks. In Israel, for example, it was perceived during the nineties and early 2000’s that interest rates must be significantly higher than in the US, otherwise capital outflows would emerge followed by a depreciation and inflation. However, in this round, and in spite of having kept rates very low, Israel faced capital inflows following the US rate hikes, as it was perceived as an “emerging markets safe haven”, and appreciation pressures emerged—a marked change from past-patterns. This corresponds with the risk perspective that Sebnem Kalemli-Ozcan presented here earlier, as a spillover of the US monetary policy, and with Governor Carney’s speech emphasizing the importance of the sources of shocks to EMEs. This shift, which was only partially offset by a sustained accommodative monetary policy, reflects the structural change in the fundamentals of the Israeli economy, including the continuous expansion of employment; the current account surpluses; the decline in the debt-to-GDP ratio since the Fiscal Stabilization program in 2003.

The strong fundamentals of Israel’s economy manifest themselves in financial markets, and are intimately related to the perceived absolute and relative resilience of the economy. Figure 2 is taken from Du And Schreger’s (2016) paper on “Local Currency Sovereign Risk”, which introduces a new measure of emerging market sovereign credit risk, and compares the development of sovereign risk in a few emerging markets between 2005 and 2014. It shows that Israel’s sovereign credit risk is low, with exceptionally low variance compared to the other countries—emphasizing the “safe haven” status within emerging and even advanced economies.


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