Investing in Israel a good prospect
No one can predict the future. Any hope we might have had for prophets in our midst has been dissipated by the frequency of black swans flocking over for the past few years.
So given that we can't predict the future and can only suggest scenarios and estimate their likelihood, I would like - on Israel's day of independence - to don rose-colored glasses. I venture to state that, barring more black swans, geopolitical upheaval and with maybe a little push in the right direction, the odds could be in favor of Israel's economy flourishing for several years to come.
Leaving aside the seemingly endless supply of new high-tech ventures, there are basically three economic drivers which lend to my optimism and confidence in the economy.
Driver one: Natural gas
Two of the world's biggest gas reservoirs to be discovered in the last decade were found in Israeli territorial waters last year. Together they hold about 24 trillion cubic feet of gas. The impact of these reservoirs on the economy is threefold. The first is investment. Tapping the gas, which lie in deep waters, will require a $20 billion investment in infrastructure. Though no doubt much of that investment will go to overseas specialized contractors, much will still impact the local market via local jobs and subcontractors. It will also impact the banks and the financial markets.
The second impact is cost savings. Through previously developed gas fields, during the last five years the Israel Electric Corporation was gradually able to move from reliance on diesel and coal as its major energy sources to gas. The Finance Ministry estimates the transition to gas has contributed $5 billion to Israel's economy so far in saved costs.
The third point is that gas makes Israeli companies more globally competitive. Israel Chemicals, a major global producer of fertilizers and specialty chemicals, has estimated it can save $100 million a year in production costs as it switches from fossil fuel to gas. ICL's case is extreme but it shows how gas can impact the cost of local production.
Driver two: Broadening employment
In 2000, participation in the Israeli workforce was less than 55%. Come 2011, it has reached an all-time high of 58%. Unemployment has remained stable at a range of 6% to 7% over the last two years.
As sectors such as the ultra-Orthodox and Israeli Arabs are drawn into the workforce, their contribution to the economy increases as they move off welfare and consume more.
The OECD average for participation in the workforce is 63%. We have a way to go, but on the upside, people joining the workforce is a strong economic driver. The fact that this has become a national priority has led both the state and the private sector to work toward this end. That in itself increases the odds that this will actually happen.
Driver three: Housing
This is a tough one. Unlike the rest of the west, Israel's housing inventory is at an all-time low.
There are approximately 10,000 available dwellings while annual demand is for 35,000. This is tricky since:
a ) Property prices are very high;
b ) There is no data concerning the public's purchases of housing for investment purposes - i.e. to rent out, not to live in. The percentage of dwellings owned by people for investment purposes is unknown; and
c ) Historically, Israel's property market was controlled, to provide affordable housing only within specific geographic areas, to specific congregations.
The truth is, housing has become a major weight around the neck of Israel's middle-class. If lifted, it could do wonders for internal consumption. If the housing market is opened and a wave of building is permitted in popular areas - e.g., the greater Tel Aviv area - we could see a boom in tangential markets, from cement to plumbing, from furniture to electric appliances.
As recent global history has shown, it's difficult to expand the housing market responsibly. It's hard to achieve the right balance between too much building (causing a crash ), and too little, lifting prices sky high. Yet if achieved, a mild, slow decline in housing prices due to growth on the supply side of the equation will bring down family expenditure on real estate, lending further to domestic consumption. This could be a relatively strong positive economic driver but the political forces seem very reluctant to take this route.
The stakes are high. The Middle East could be swept by a wave of religious extremists burying it back in the sand for decades or it could be swept by democratic forces and prosperity as economic growth pushes further into the undeveloped regions. Investing in Israel in its 64th year is a great investment: There are many good reasons for this economy to grow. And it could be a significant investment: Strengthening the economy, strengthening democracy, strengthening the prospects of the region - and giving Israel what it needs most, a push in the right direction.