Report on the Investment of Israel's Foreign Exchange Reserves in 2013

Full Review

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The annual report on the investment of Israel's foreign exchange reserves for 2013 was published today. The following are the main points in the report: 

  • Israel's foreign exchange reserves increased by about $6 billion in 2013, compared with an increase of about $1 billion in the previous year. At the end of 2013 they totaled $81.8 billion.[1]

  • In 2013, the Bank of Israel renewed its intervention in the foreign exchange market, purchasing $5.3 billion. Of that sum, $3.2 billion were purchased within the framework of the Bank of Israel’s intervention intended to moderate exchange rate volatility which is not in line with fundamental economic conditions in Israel, and $2.1 billion were purchased within the framework of implementing the plan, which began in May 2013, to moderate the effect of natural gas production on the exchange rate.

  • This year, the holding period rate of return on the reserves, in terms of the numeraire[2], was 0.9 percent, compared with 1.6 percent in the previous year and around 2.8 percent, on average, between 2004 and 2013. The low rate of return was affected, like in the previous year, by the low level of interest rates and yields in financial markets in which the reserves are invested, and by the continued management of the reserves with a short duration, which is intended to reduce the risk of a negative return on the portfolio if yields increase. The increase in yields in financial markets beginning in May led to capital losses in the portfolio, and as a result, to a low holding period rate of return even compared with the previous year.

  • The active management contribution in 2013 was 80 basis points, twice the average of the past decade. This contribution is attributed primarily to investment in equities, which contributed 134 basis points and which were partially offset by a loss of 62 basis points from the investment in currencies and assets of countries whose currencies are not included in the numeraire.

  • During the course of the year, the equity allocation was increased from 3 percent to 6 percent of the reserves, and was expanded to include Germany, France, and the UK.

  • The investment of the reserves in countries whose currencies and assets are not included in the numeraire  or the benchmark was reduced during the year from 9.8 percent to 2.8 percent.

  • At the end of the year, the risk profile was defined in the investment policy guidelines for the foreign exchange reserves, in terms of the maximum loss that the Monetary Committee is willing to absorb without negatively impacting the achievement of the goals for which the reserves are held. The risk profile which was defined reflects a higher risk level than had been previously defined. The change in the risk profile was made possible by the increase in the level of the reserves and the integration of foreign exchange purchases within the framework of the natural gas program, which are characterized by a longer term investment horizon. Therefore, in January 2014, the investment policy guidelines for the foreign exchange reserves were updated. In the update, the maximum permitted allocation to equities was increased, and investments in corporate bonds were approved in principle. Against this background, in 2014, an initial pilot investment in corporate bonds is planned, as is an increase in equity investments to 8 percent of the reserves.


[1] The level of the reserves includes allocations of Special Drawing Rights by the International Monetary Fund to member countries (SDR Allocation) and Israel's balance in the Reserve Tranche of the Fund. At the end of 2013 these totaled $2.2 billion. For more on this issue, see the Bank of Israel's Financial Statements for 2013 at:
[2] The numeraire is a currency basket in which the foreign exchange reserves are measured. The numeraire composition serves as the neutral currency composition of the reserves.