chapter 3 the financial account · 3.1.3) and investment flows, which came to $ 3.3 billion on...

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CHAPTER 3: THE FINANCIAL ACCOUNT

Chapter 3

The Financial Account1

1. NONRESIDENT INVESTMENT

a. Main developments

The continuation and worsening of the global high-tech crisis dampened nonresidentinvestment for the second consecutive year.2 Ongoing declines in high-tech share pricesand global activity were the main reasons for the $ 4 billion decrease in the net value ofnonresident investments. As the global high-tech crisis escalated, the continuation ofregional security unrest also had a downward effect on nonresident investment, espec-ially in deposits. However, the impact of the security situation on Israel’s high-techindustries and, perforce, on nonresident investment seems to have been relatively mild.

Investment flows were only $ 3.8 billionin 2002, far below their level in recent years(Table 3.1.1), including years of crisis inglobal capital markets (2001 and 1998).Alongside the slump, investments in capitalinstruments continued to decline and thatin debt instruments expanded (Figure3.1.1), which is typical of uncertain times.

During the year reviewed, investors in-ternalized the realization that the globalcrisis, especially in high-tech, was notabout to blow over quickly. Thus, the directinvestment flow, which is influencedmainly by long-term changes, slowed by60 percent. The decline in direct investmentaccounted for the entire downturn in invest-ment flow, while portfolio and otherinvestments rose after falling in 2001.

The entire decline in investment flow occurred in high-tech industries, which lost$ 2.4 billion in flow relative to 2001; nonresident investment in traditional industries3

1 The analysis in both parts of Chapter 3 is based on data from the Foreign Exchange Activity Department,which permit thorough and detailed analysis in various cross-sections. These data serve as bases for thebalance-of-payments data that the Central Bureau of Statistics publishes but are not identical to them. Thedifference between the two data sets is due mainly to differences in timing of adjustment of the data.

2 High-tech industries are electronics, pharmaceuticals, communications, software, R&D, and aircraft.3 In this chapter, traditional industries are all industries other than high-tech.

The decrease innonresident investmentwas caused mainly bythe perseverance ofthe global high-techcrisis.

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BANK OF ISRAEL, FOREIGN EXCHANGE ACTIVITY DEPARTMENT, ANNUAL REPORT 2002

increased by $ 1.4 billion (Figure 3.1.2).Nonresident investment in high-techbegan to trend down in the last quarter of2000, when the onset of global crisis inthese industries was reflected in decreasesin share prices in global capital markets.Net investment declined by $ 26 billionfrom the end of the third quarter of 2000to the end of the period reviewed (Figure3.1.3) and investment flows, which cameto $ 3.3 billion on quarterly averageduring the boom period (from the fourthquarter of 1999 to the third quarter of2000), declined to $ 1 billion on averagein 2002 (Figure 3.1.4). No investmentswhatsoever were made in the fourthquarter (Figure 3.1.4).

The contraction of global high-techactivity and the declines in technologyshare prices affected all components ofnonresident high-tech investment—issuesabroad by Israeli high-tech companies,direct investment in nontraded high-techcompanies, and nonresidents’ reinvestedearnings in nontraded high-techcompanies. Investment flows in thesecomponents fell from $ 9 billion in 2000,the peak year of the high-tech boom, to$ 4.6 billion in 2001 (Figure 3.1.5) andonly $ 1.3 billion in 2002.

Domestic developments—the ongoingsecurity unrest and additional factors—contributed to an $ 0.8 billion net declinein nonbank nonresidents’ deposits with thedomestic banking system. The netwithdrawals in 2002 reflect thecontinuation of a trend that began in thesecond half of 2001, after a very lengthyperiod of large surpluses in depositspeaked in 1999 at $ 2.5 billion. Thewithdrawals were one of the reasons forthe shortage of forex sources in the banking system.

For the first time,there were net

withdrawals fromnonresident deposits

with the domesticbanking system.

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Neither the decline in nonresidentinvestment nor the composition of thedecline is unique to Israel. According tovarious publications,4 private capitalflows to emerging markets continued todecrease in 2002 (Figure 1.3) and mostof the decline occurred in directinvestment, as in the case of Israel.However, nonresident investmentdeclined more steeply in Israel than inthe emerging markets at large, asreflected in a decrease in Israel’s sharein private capital flows to thesemarkets—from 5 percent in 2000 to halfthat fraction in 2002. Israel’sdisproportionate decrease in thesecapital flows is mainly a reflection ofthe large fraction of high-tech—whichis mired in crisis—in its GDP and

balance of payments relative to other countries5 (Table 1.2).

Table 3.1.1Nonresident Investment, 1998–2002

($ billion)

Total change in of which

1998 1999 2000 2001 2002 2002b Change in prices

Total investment flows 4.5 9.1 11.5 4.8 3.8of which High-tech 1.1 4.5 9.6 4.5 2.1Direct investments 1.9 3.1 5.0 3.8 1.5Portfolio investments 2.4 2.6 5.1 0.2 0.8Other investmentsa 0.2 3.4 1.4 0.8 1.5

Balance of investment (end of period) 77.7 106.7 117.3 106.7 103.0 –3.7 –8.1Direct investments 10.6 20.2 23.9 25.2 24.3 –0.9 –1.6Portfolio investments 26.9 43.8 49.6 36.9 32.3 –4.6 –6.5Other investments 40.2 42.7 43.8 44.6 46.4 1.8 0a Other investments include deposits with the Israeli banking system and loans to residents.b The total change in the balance of investment is made up of investment flows, shown in the upper part of thetable, the effect of prices, exchange-rate differentials, and other adjustments not shown here.SOURCE: Based on reports from banks, companies, and the government.

4 Institute of International Finance, Capital Flows to Emerging Market Economies, January 2003. This

publication does not define Israel as an emerging market.5 Another indication of the importance of high-tech in Israel is the number of Israeli companies listed

for trading on the NASDAQ exchange: eighty-two as against only eighteen from the twenty-nine emerging

markets.

Israel’s share incapital flows toemerging marketsdecreased due to thelarge proportion ofhigh-tech industries inIsrael’s GDP andbalance of payments.

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b. Direct investment

The balance of foreign direct investmentin Israel declined by $ 0.9 billion in 2002(4 percent). This balance, which consistsof investments in nontraded companiesand real estate, loans from principals, andprincipals’ holdings in companies tradedin Israel and abroad, was $ 24.3 billion atyear’s end—$ 20 billion nontradable and$ 4.3 billion tradable. Investment flowswere $ 1.5 billion in 2002, down 60 per-cent from 2001 (Table 3.1.2). All the dec-rease occurred in high-tech, where foreigndirect investment fell from $ 3.3 billionin 2001 to only $ 1.1 billion (Figure3.1.6). Investment in traditional indus-tries, in contrast, remained $ 0.4 billion.

Investment in nontraded companies—the main component of foreign directinvestment—decreased from $ 4.2 billionin 2001 to only $ 1.7 billion in 2002 butremained higher than in all yearspreceding the high-tech boom (Figure3.1.7). Investment flows in nontradedcompanies declined due to three mainprocesses that had begun in the lastquarter of 2000, and which were all theoutcome of the global high-techslowdown. The effect of the regionalsecurity situation on foreign directinvestment was relatively mild.

(1) Corporate acquisitionsAcquisitions of established Israeli high-tech firms by multinational corporations,in which the acquiring companyintegrates the acquired company’ sproduct line into its activities, continuedto decline steeply. In view of theprolongation of the global downtrend inhigh-tech corporate acquisitions and thedecrease in these companies’ share prices,

Direct investmentdecreased steeply,

foremost in high-tech.

Acquisitions of Israelitechnology companies

plummeted.

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only one Israeli company was acquiredin 2002 for $ 100 million, as against fourcompanies for $ 1.6 billion in 2001—intransactions that were largely concludedbefore technology shares fell —and ninecompanies for $ 2.5 billion in 2000.

(2) Start-up companiesInvestments in start-up companiesdeclined from $ 1.3 billion and $ 1.4billion in 2001 and 2000, respectively, to$ 0.9 billion in 2002 (Figure 3.1.8). Thislevel of investment, however, surpassedthe $ 0.4 billion annual average in 1998and 1999 (the years preceding the high-tech boom, which was particularly visiblein this sector). Most of the decreaseoccurred in the communications andInternet industries; investment in life-

sciences and software companies was relatively stable. The abrupt decrease in 2002after stable performance in 2001 gives further evidence of the deepening convictionamong investors that the high-tech crisis will be lengthy.

According to surveys by Israeli research agencies,6 Israeli venture-capital fundsraised no money in 2002 after having raised an annual average of $ 2.3 billion in1999–2001. According to these sources, the funds’ capital stock for future investment—most of which was raised from nonresidents—is $ 4.9 billion: $ 3.7 billion for continuinginvestments and the remainder, $ 1.2 billion, for investment in new companies.Therefore, the steep decline in capital raised will be reflected in the level of investmentin start-up companies in future years, unless the industry mounts a recovery.

Table 3.1.2Direct Nonresident Investment, 1998–2002

($ billion)

1998 1999 2000 2001 2002

Total investment flows 1.9 3.1 5.0 3.8 1.5of which Nontraded companies 0.8 2.4 4.9 4.2 1.7

of which Full acquisition ofcompanies 0.8 1.8 2.5 1.6 0.1

Start-up companies 0.3 0.6 1.4 1.3 0.9 Undistributed earnings 0.0 0.5 1.5 0.6 0.4

SOURCE: Based on reports from banks, companies, and the government.

The decline ininvestments in start-upcompanies is part of aglobal trend.

6 Israel Venture Capital (I.V.C.), Money Tree.

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Investment in start-up companies is anindicator of nonresident confidence inIsraeli technology, and the decrease insuch investment is part of a global trend.Start-up investment declined by 35percent in Europe and by a larger fractionin the United States (Figure 3.1.9).

(3) Reinvested undistributed profitsThe continuation of the global high-techslump has also been adverse to the salesof Israeli companies that operate in theseindustries and manufacture solely forglobal markets. Consequently, theearnings of these companies havecontinued to decline and the share ofnonresidents in the companies’ reinvested

earnings was only $ 0.4 billion in 2002as against $ 0.6 billion in 2001 and arecord $ 1.5 billion in 2000. The decreasein earnings was observed both intechnologically innovative ‘ niche’companies and in other companies, unlike2001, when the niche companiessustained little damage. Both the nichecompanies and the others were affectedbecause the high-tech crisis wasperceived in 2001 as a short-term event,and so demand for the products oftechnologically innovative companieshardly declined. In 2002, consumersbecame increasingly convinced that thecrisis was not about to blow over;therefore, demand for the products oftechnologically innovative companiesalso waned.

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The decrease in foreign directinvestment is not unique to Israel, asstated. According to variouspublications,7 direct investment inemerging markets declined by 22 percentrelative to the 2001 level, with upturnsin Eastern Europe and Eastern Asia anddownturns in Latin America and Africa.Direct investment fell more steeply inIsrael than in other emerging marketsmainly because high-tech in Israelaccounts for a large proportion of directinvestments—more than 80 percent in1999–2001.

c. Portfolio investment

Nonresident portfolio investment iscomposed of nonresidents’ financialholdings in shares and bonds (‘straight’and convertible) of Israeli companies thatare traded on the Tel Aviv StockExchange (TASE) and abroad and inIsrael Government bonds. The balance ofthe portfolio, most of which is traded onforeign exchanges, decreased by $ 5billion (12 percent) in 2002 and endedthe year at $ 32 billion (Figure 3.1.10),approximating the mid-1999 level.Investment flows increased from $ 0.2billion in 2001 to $ 0.8 billion 2002(Table 3.1.3) but investment in high-tech,which peaked at $ 5.5 billion in 2000,tumbled to $ 1.4 billion in 2001 and only$ 0.6 billion in 2002, as part of the globaltrend (Figure 3.1.11).

(1) Nonresident investment in shares ofIsraeli companiesThe balance of nonresident shareholdingsin Israeli companies that are tradedabroad and on the TASE declined by

7 Institute of International Finance, Capital Flows to Emerging Market Economies, January 2003.

Nonresident portfolioinvestment in high-techcompanies decreasedsteeply in the past twoyears.

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$ 5.2 billion (27 percent) in 2002 andended the year at $ 13.6 billion.Investment flows were only $ 0.5billion, similar to the 2001 level, and$ 6.5 billion, nearly all of which in high-tech shares traded abroad, was lost dueto price declines.

The ongoing high-tech crisis broughtpublic share offerings abroad to a totalhalt, making 2002 the worst year in thepast decade in the main component ofnonresident portfolio investment (Figure3.1.12). Israeli companies raised only$ 120 million in 2002 (most of whichdue to the exercise of options bycompanies’ foreign employees) asagainst $ 0.7 billion in 2001 and a record$ 3.5 billion in 2000.

Israel was not alone in suffering froma decline in the extent of capital raisedby high-tech firms. In 2002, the amountraised on the NASDAQ exchange wasthe lowest in a decade. What is more,much of the capital was raised in massive issues by companies in traditional industries,where Israeli firms do not appear to be suited for the American capital market. In thesoftware and Internet industries, in contrast, many Israeli companies are suited forissuing. In these fields, the extent of initial public offerings on all American stockexchanges plummeted from $ 23 billion in 2000 to $ 5 billion in 2001 and only $ 2billion in 2002.

Table 3.1.3Nonresident Portfolio Investment, 1998–2002

($ billion)

1998 1999 2000 2001 2002

Total investment flows 2.4 2.6 5.0 0.2 0.8Shares and bonds traded on TASE 0.3 –0.1 –0.3 –0.7 –0.2Shares and bonds traded abroad 0.2 1.6 4.7 1.2 0.7

of which Share issues 0.3 2.1 3.5 0.7 0.1Corporate bonds traded abroad 0.5 1.1 0.7 0.2 0.2

of which Bond issues 0.6 1.2 1.4 0.9 0.0Government bonds traded abroad 1.4 0 –0.1 –0.5 –0.1Government bonds traded in Israel 0 0 0 0 0.2SOURCE: Based on reports from banks, companies, and the government.

The steep decline incapital raising by high-

tech companies wasnot unique to firms in

Israel.

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The balance of nonresident portfolio investment in Israeli firms traded abroad was$ 12.4 billion at year’s end, and more than 70 percent of the balance was invested inonly two companies, the share prices of which declined by 21 percent on averageduring 2002. The prices of all 118 shares of Israeli firms traded abroad fell by 34percent on average, as against declines of 32 percent in the NASDAQ Compositeindex and 37 percent in the software component of this index, in which most Israelicompanies are traded (Figure 3.1.13).

Sales on the TASE slowed to only $ 0.2 billion as against $ 0.7 billion in 2001. Thetrend actually began in the second half of 1998, in a reflection of the global tendency toshift investments from traditional to high-tech industries. This process, manifested inIsrael in the shifting of investments from companies in traditional industries, traded onthe TASE, to Israeli high-tech firms that are nearly all traded abroad, appears nearly tohave exhausted itself in Israel. Nonresident portfolio investment is highly centralized;about 60 percent of the balance, $ 1.3 billion, is kept in only three rather heavily tradedcompanies. The relatively small trading volume on the Tel Aviv Stock Exchange is adisincentive to nonresidents, most of whom, as stated, are large institutional investors.Indeed, the share of nonresidents in the portfolio of Tel Aviv stocks held by portfolioinvestors has been declining for several years—from 15 percent in 1998 to 7 percent atthe end of 2002.

Realization ofinvestment in sharestraded on the Tel AvivStock Exchangeslowed.

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As stated, the decline in portfolio investment in shares in 2002 was not unique toIsrael. The difficulties in raising capital in developed countries, especially the US, andforemost in technology industries, and the high level of risk in global stock marketsprompted investors to cut back on their portfolio investments in shares and to moveinto less risky assets. Consequently, less foreign private capital was invested in sharesin emerging markets as portfolio investments, and these markets, unlike Israel, witnessednet sales. By inference, nonresident portfolio investment in Israeli shares8 was affectedmainly by international developments and only slightly by domestic ones.

(2) Nonresident investments in bondsCorporate bonds: The balance of outstanding corporate bonds issued by Israeli firmsabroad and held by nonresidents, including convertible bonds, was $ 4.3 billion at theend of 2002 and has hardly changed in the past two years. Companies issued $ 1.5billion in bonds in 2000, including $ 0.9 billion in convertible bonds of high-techcompanies. In 2001, the high-tech crisis led to a total cessation of high-tech bondissues; the only capital raised in this fashion, $ 0.9 billion, was in issues of ‘straight’bonds by infrastructure companies. In 2002, issuing by infrastructure companies alsocame to a nearly total halt.

Developments in this field in 2002 were due largely to actions by the Israel ElectricCorporation. IEC, which accounted for 95 percent of the value of corporate bonds heldby nonresidents at the end of 2002, raised $ 0.7 billion on annual average abroad bymeans of this instrument in 1996–2001. In 2001 and early 2002, IEC sustained severelosses due to the real currency depreciation. Concern about further depreciation andthe implementation, at the beginning of the year, of an institutional arrangement thatmade NIS credit preferable to forex credit from the IEC’s standpoint were the mainreasons for the steep decrease in overseas bond issues—from $ 1 billion on annualaverage in 2000–2001 to only $ 0.1 billion in 2002.

Corporate bonds traded abroad are also held by residents (households and institutionalinvestors). In 2001, residents acquired $ 750 million in such bonds from nonresidentsin the secondary market in order to diversify their forex investments and take advantageof the yield spread between these instruments and others. In 2002, resident acquisitionsof these bonds declined steeply due to the decrease in the quantity of ‘ floating’ bondsand the narrowing of yield spreads.

Government bonds: The balance of nonresident investments in government bondstraded abroad was $ 14 billion at the end of 2002, similar to the end-of-2001 level—$ 12.4 billion guaranteed by the US Government and $ 1.6 billion unguaranteed. Netrealizations (redemptions less issues) were $ 0.4 billion in 2002 as against $ 1.1 billionin 2001. The policy in recent years has been to issue bonds in various markets in order

8 In November 2001, the method of computing the MSCI index—the accepted share index for emergingmarkets—was revised in a way that caused Israel’s share in the index to decline. Practically speaking,large institutional investors invest less in Israel than the index shows. One reason for the decline in Israel’sshare in the index is the high proportion of high-tech industries in Israel.

Hardly any capital wasraised by means of

bond issues this year.

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to establish new capital-raising venues not only for the government but also for theprivate sector. The government created an infrastructure for private-sector issues—which, as stated, was not used this year—and set a benchmark against which the costof Israeli corporate issues may be determined.

The yield levels of government bonds are affected, among other things, by the regionaland American security situation. During most of 2002, the yield spread of IsraelGovernment bonds over US Government bonds to similar terms was about 135 basispoints—smaller than before the domestic security unrest broke out in September 2000—but around September it climbed again to 170 points, evidently due to fears that thestate budget would not be passed. After the budget was passed and reports aboutAmerican guarantees appeared, the spread receded to 140 basis points. Although thecost of issuing (including the spread that was predominant during the year) was low inmultiannual terms, the government refrained from large-scale issues of these types dueto concern about the reflection of domestic uncertainty factors in the cost.

Nonresidents invest not only in government bonds that are traded abroad but also intradable Israel Government bonds issued in Israel and in Treasury bills. In the past,they made scanty investments in these instruments despite the NIS-forex interest spread.In June and July 2002, however, foreign financial institutions acquired $ 350 millionin Shahar (government bonds) and Treasury bills after holding only $ 100 million inthese securities at the beginning of the year. Nonresidents, mainly financial entities,normally manage their exposure to changes in NIS-dollar interest spreads mainly bymeans of swap transactions in the forex market. Their bond acquisitions in the middleof 2002 were prompted by high yields on nonindexed tradable government bonds andby the prospect of small interest spreads relative to those priced from sources raised byIsraeli banks. Much of these acquisitions were sold several months afterwards, leaving$ 0.3 billion in nonresidents’ hands at year’s end.

d. Other investments

Other nonresident investments include forex and NIS deposits with Israeli banks andfinancial and commercial credit from abroad to general government and the nonbankingprivate sector. The balance of these ‘other investments’ increased by $ 1.8 billion (4percent) in 2002 and came to $ 46.4 billion (Figure 3.1.14).

(1) Nonresident deposits with the Israeli banking systemThe balance of nonresident deposits in Israel climbed by $ 0.9 billion in 2002 andended the year at $ 24 billion. About 98 percent of these deposits are in forex; theremainder are in NIS. About 80 percent of the forex deposit sum is deposited for termsnot exceeding one year and 10 percent is deposited for no longer than three months.Practically speaking, however, the deposits are renewed when they come due and arekept to very lengthy terms.

The government did notmake sizable issuesabroad this year.

Foreign financialinstitutions acquiredNIS government bondsfor the first time.

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Nonresident deposits by nonbankingdepositors, which account for 90 percentof forex deposit balance, were stagnantfor the second straight year after havinggrown in 1995–2000 by $ 1.1 billion onannual average. The deposit flows(including accrued interest) recorded netwithdrawal this year, for the first time, inthe amount of $ 0.8 billion (Table 3.1.4).The net withdrawal in 2002 followed alengthy period of net depositing thatpeaked in 1999 and 2000 at $ 2.5 billion.The withdrawal trend actually began inJune 2001, and the cumulative netwithdrawal from then to the end of 2002came to $ 1.2 billion (Figure 3.1.15). Thechange in nonresidents’ behavior in thesecond half of 2001 traces to a confluenceof several major factors: the persistenceof regional security tension; the lowinterest rate on short-term dollar deposits,which encouraged investors to move toother financial assets—not necessarilyIsraeli ones—and the Prohibition ofMoney-Laundering Law, which went intoeffect in 2002 and evoked concern amongdepositors about the exposure of theiridentity and the nature of theirtransactions. Additionally, in recent yearsthe depositors’ characteristics have changed in ways that been adverse to forex deposits.In the past, depositing was an expression of support for Israel; Israel’s country risk andinternational interest rates had little to do with the pace of depositing. Today, the latterfactors are of greater concern to depositors.

Table 3.1.4Other Nonresident Investment in Israel, 1998–2002

($ billion)

1998 1999 2000 2001 2002

Total investment flows 0.3 3.5 1.4 0.8 1.6Nonresidents’ forex deposits 1.4 2.6 1.9 0.3 –0.8Foreign banks’ forex deposits –0.1 –0.3 –0.4 1.0 1.0Credit to private sector –1.1 0.8 –0.2 –0.7 1.4Credit to general government –0.2 0.2 0 0.2 –0.1SOURCE: Based on reports from banks, companies, and the government.

Nonresident depositsrecorded net with-

drawals for the firsttime.

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The balance of foreign banks’ deposits (including those of Israeli banks’ overseasaffiliates) with the Israeli banking system increased by a sizable $ 1 billion in 2002,about half of which in the first quarter of the year. The swift increase, pursuant to anincrease of $ 1 billion in the last quarter of 2001, was due mainly to deposits by foreignaffiliates of Israeli banks that were designed to ease the shortage of forex sources in theIsraeli banking system, i.e., the parent companies of the depositing banks. The shortageworsened in the first half of 2002 in view of the decline in deposits by nonresidents atlarge and an upturn in resident demand for forex credit. (See Part 2, ‘The NIS-ForexMarket.’ )

(2) External credit to the nonbanking private sectorOutstanding nontradable credit to the nonbanking private sector (net of loans fromprincipals) was $ 9.1 billion in 2002 as against $ 8.3 billion at the end of 2001.Outstanding direct credit (total credit less suppliers’ credit) was $ 5.2 billion—$ 0.3billion greater than the end-of-2001 level—and suppliers’ credit increased by $ 0.5billion to $ 3.9 billion. Direct credit from foreign banks, which accounts for 40 percentof total direct credit, is highly centralized: 75 percent of this credit was taken by threecompanies. About 60 percent of the credit is dollar-denominated and 65 percent is forterms exceeding five years.

(3) External credit to general governmentOutstanding nontradable forex credit togeneral government came to $ 12.7 billionat the end of 2002, almost unchangedfrom the year-earlier level. The mostimportant source of such credit is Stateof Israel Bonds, of which $ 9.5 billion wasoutstanding at the end of 2002, and whichserve as an alternative to the issue oftradable bonds as a way to raise capital.Under the influence of the domesticsecurity situation, the DevelopmentCorporation for Israel (the ‘ BondsOrganization’ ) raised a record $ 1.4billion in 2002, as against $ 0.9 billionon annual average. Due to $ 1.1 billion inredemptions of Israel Bonds, only $ 0.3billion was raised in net terms. IsraelBonds are composed of fixed-interestinstruments and other bonds that pay

floating interest based on LIBOR. Since demand for fixed-interest bonds increased in2002 due to the widening of the spread between long-term and short-term interest ratesin the United States, the share of these bonds in total issues climbed to 58 percent as

Capital raising bymeans of Israel Bondsset a new record thisyear.

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against 47 percent in 2001. The yield spread on fixed-interest ten-year bonds issued bythe Bonds Organization in 2002 was 160 basis points over similar US Governmentbonds, as against an average spread of 170 points in 2001. In addition to Israel Bonds,the government raised capital from foreign governments, international institutions,and foreign banks. Outstanding credit of this type has been stable at $ 3.2 billion forthe past few years.

2. RESIDENT EXTERNAL INVESTMENT9

a. Main developments

Resident external investments in 2002 were affected mainly by domestic developmentsand only slightly by international ones. The investment flows were $ 3.9 billion (Table3.2.1), far below the level in past years including 1998 and 2001, when crisis in globalfinancial markets and exchange-rate volatility were rampant. Most of the declineoccurred in ‘other investments’ (external bank credit and bank deposits) and in assetsof general government. Direct investment, which is influenced mainly by long-term

Table 3.2.1Resident External Investment, 1998–2002

($ billion)

Change inb of which

1998 1999 2000 2001 2002 2002 Change in prices

Total investment 5.1 7.0 9.4 4.8 3.9Direct investment flows 1.1 0.9 3.4 0.8 0.9Portfolio investment –0.1 0.8 2.1 1.1 2.7Other investmenta 2.3 3.9 3.0 2.5 1.6Public sector 1.8 1.4 0.9 0.4 –1.3

of which Bank of Israel reserves 1.7 0.9 0.8 –0.2 –1.0

Investment balance (end of period) 50.5 56.0 64.4 66.8 72.0 5.2 –0.6Direct investment 5.4 6.2 9.3 8.9 9.8 0.9 –0.1Portfolio investment 2.9 4.9 7.2 7.9 10.1 2.2 –0.9Other investmenta 19.0 21.5 23.5 26.0 27.5 1.5 0.0Public sector 23.2 23.4 24.4 24.0 24.6 0.6 0.4

of which Bank of Israel reserves 22.7 22.5 23.2 23.2 23.7 0.5 0.4a Other investment includes deposits in foreign banks and credit to nonresidents.b The total change in the investment balance consists of investment flows, the effect of prices, exchange-rate differentials, andother adjustments not presented here.SOURCE: Based on reports from banks, companies, and the Ministry of Finance.

9 The private sector’s external investments in 2002 were severely affected by strong exchange-ratevolatility, interest spreads, and exchange-rate risk. For extensive discussion of these matters and theirimpact on private-sector activity in forex—domestic and external—see Part 2, ‘The NIS-Forex Market.’

considerations, was stable and portfolio investments increased rapidly in the first halfof the year and stopped in the second half.

The fall in residentexternal investmentderived mainly from

domesticdevelopments.

chapter 3 the financial account · 3.1.3) and investment flows, which came to $ 3.3 billion on...

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