Recent Economic Developments, 84

01/11/1998
All Press Releases In Subject:
The Economy and Economic Activity
Recent Economic Developments, 84, April 1998 - September 1998


 Main Developments
  The Principal Industries
   The Labor Market
    The Balance of Payments
     International Developments
       and Their Effect on Israel
       Prices
        The Government
         The Money and Capital Markets



Previous Economic Developments 83


Main Developments

There have been dramatic developments in the global economy in recent months, foremost among them financial shocks and crises in world markets, and a decline in global growth rates and trade. Any analysis of the period reviewed, especially the most recent part, must concern itself with these events.

From April to September 1998 (the period reviewed)1 the slowdown in economic growth persisted: per capita GDP fell, continuing the decline of 1997, the rate of unemployment rose, and the current-account deficit contracted; the rate of price increases remained moderate until August, and accelerated in August in the wake of local-currency depreciation.

Since the second half of 1996 the rate of GDP growth has been sluggish, and many indicators show that economic activity slowed further in 1998, with GDP rising even more slowly than in 1997. The lower rate of GDP growth is mainly the result of the slowing of domestic and international demand. The main causes of the slowdown in domestic demand and activity from the second half of 1996 to the end of the period reviewed were the tapering-off of the effect of large-scale immigration in general, and in particular the fall in investment and the convergence of capital stock to the level appropriate to the future growth rate; adherence to fiscal restraint, reflected in the reduced rate at which public consumption rose; monetary discipline; and political and security-related uncertainty, which mainly affected the tourist industry. The most striking developments in the period reviewed were, however, the dramatic events in many world markets, reflected inter alia by increased volatility, higher assessment of risk, and greater uncertainty in Israel's capital and foreign-currency markets, and by a decline in exports, which had led the growth of the last two years.

International developments overshadowed Israel's economy in the period reviewed. The protracted crisis in East Asia worsened, Russia, suffering from domestic problems, underwent an acute economic crisis, Japan's recession and financial difficulties deepened, and as a result of all these factors South America, especially Brazil, was also threatened by a financial crisis. These developments-reflected inter alia by considerable exchange-rate volatility and plummeting share prices-undermined global financial stability and led to a further decline in world growth rates and trade, as well as to a fall in trade prices. In Israel the developments in the financial markets were reflected by exchange-rate volatility-particularly since August-and falling share prices. The outstanding feature of foreign trade is that while exports continued to grow significantly at the beginning of the year, alongside an improvement in Israel's terms of trade and the current-account deficit, since May exports have fallen.

Business-sector product increased by 1.3 percent in 1998:II compared with 1997:II. Indicators of activity by industry show that the trends evident in 1997 intensified: industrial production increased by a moderate 2.0 percent in 1998:II, and the decline in industrial exports in 1998:III might presage a further slowdown in industrial production in this quarter, too; investment in construction, especially residential, continued to decline; and the growth of commerce and tourism remained sluggish.

Employment in 1998:II also reflects the moderation of demand and slowing of GDP growth. The rise in unemployment and the number of unemployed accelerated in 1998:II: unemployment deepened and reached 9.4 percent, and the number of unemployed rose to 213,000. Nevertheless, trend data suggest a stable unemployment rate from April to August. Real wages rose markedly in the period reviewed, mainly in the business sector. The factors contributing to this were the rise in labor productivity-due inter alia to dismissals of workers at the lower end of the wage-scale and the change in the composition of employment by industry-a shortage of labor in certain industries, principally high-tech, and a greater slowing of inflation than was expected when the wage agreements were signed. In September, following a strike by public-sector employees, a wage agreement was signed for some segments in this sector.

The domestic deficit of the public sector (cash basis) was 2.4 percent of GDP in the period reviewed. A comparison of planned and actual revenues and expenditure shows a serious shortfall in the former and under-implementation in the latter. The path followed to date suggests that the total government deficit for 1998 will be close to the target for the year-2.4 percent of GDP.

In May-August the Consumer Price Index (CPI) rose at a moderate rate, after an exceptional increase in April in connection with the local-currency depreciation that month and seasonal price increases. These increases accelerated in September due to the cumulative effect of the local-currency depreciation evident since August. Thus, since the beginning of the year the CPI has risen by only 5.4 percent, and by 8.1 percent, in annual terms, during the period reviewed. The CPI excluding housing, fruit and vegetables, goods whose prices are controlled, and clothing and footwear rose by 5.3 percent, and the wholesale price index rose by only 2.3 percent. Inflation expectations as derived from the capital market remained stable at 5 percent in April-July, rising to 9 per-cent in August and September, and to over 10 percent in October, fluctuating and falling to 7 percent at the end of the month. Part of the rise captured by expectations reflects the increase in the risk premium in the capital market in the light of increased volatility in world financial markets in general, and in Israel in particular.

The Bank of Israel's key interest rate was reduced by a cumulative 3 percentage points in the period reviewed (until August), and was raised by 2 percentage points at the end of October. In August, in view of the significant reduction of the inflation environment, an inflation target of 4 percent was set for 1999, the slope of the lower limit of the exchange-rate band was reduced from 4 to 2 percent, and the Bank of Israel reduced interest by 1.5 percentage points. The intensification of the shocks and instability in global financial markets increased the assessment of exchange-rate risk. All these created a new environment for financial market activity in Israel.

Apart from rapid depreciation in April, the exchange rate remained close to the lower limit of the band from the beginning of the year until July. In August and September the exchange rate against the currency basket rose by a cumulative 6.8 percent, inter alia due to the activity of domestic investors intended to reduce exchange-rate risk, and sales of financial assets by foreign investors. In the period reviewed the share-price index fell by 6.5 percent, most of the decline occurring in August and September. Changes in the monetary aggregates through July reflected the public's move to a more liquid asset portfolio. In August and September this trend reversed in response to the reduction of the interest rate and the rise in inflation expectations.

During October the NIS depreciated by 11.7 percent against the currency basket and by 10.5 percent against the dollar, with wide fluctuations in exchange rates and a 7 percent drop in the general share-price index. Both the decline in the share-price index and the depreciation are explained by the activity of domestic investors, who took steps to reduce their exposure to exchange-rate risk, and to that of foreign investors, who sold their domestic financial assets in response to sharp falls in the European and US stock markets, and instability and steep fluctuations in international markets. On 26 October, the Bank of Israel raised the interest rate by 2 percentage points, to 11.5 percent. This was necessary to prevent developments in the financial markets and the rise in the CPI for September, as well as that expected for October, from being translated into rapid inflation, erosion of the real depreciation, and the undermining of economic stability.

1 Due to recent world-wide economic events, mainly in the financial markets, the review has been extended to cover October 1998, too.
 

Figure 1. State-of-the-economy index (average 1994=100)
Figure 2. Industrial production (index, average 1994=100)
Figure 3. Interest and the inflation environment
Figure 4. Housing starts and completions, and relative price


Table 1. Indicators of Business Activity, 1996-98
(all data, excluding construction are seasonally adjusted)


1997
1998
Apr-Septa
*

1996
1997
III
IV
I
II
III
1997
1998
Rates of change (annual average, percent), compared with preceding quarter
State-of-the-economy
index

3.3 4.7 -0.8 3.8 5.7 2.0 0.2 4.3 1.1 9
Large-scale retail trade 12.90 7.9 0.0 4.1 13.6 7.5 1.7 8.1 6.4 9
Manufacturing production (excl. diamonds) 5.2 2.0 -0.8 -1.3 7.1 2.0 0.7 3.2 1.9 8
Business-sector consumption
of electricity
2.2 5.8 12.2 -6.1 10.3 11.4 -44.7 5.6 3.8 7
Index of revenue
in commerce
4.7 4.0 -5.0 2.9 -0.9 -1.9 4.0 4.3 -0.3 8
Index of total revenue 6.6 4.5 -1.3 3.8 -1.5 3.2 -0.7 4.4 1.1 8
Rates of change (percent), compared with preceding quarter
Tourist arrivals -5.4 -6.0 -3.5 -3.1 -10.9 18.7 0.8 2.4 -0.4 7
Immigrant arrivals -6.1 -5.4 35.1 2.2 -32.7 -8.9 2.7 -8.9 15.9 8
Residential starts
(percent)
-18.1 -9.9 -2.0 -22.8 -0.2 -16.3 -63.5 -3.8 -56.4 7
of which:
 Government-initiated
-29.2 -18.0 -27.2 -5.3 -10.6 -41.0 -46.8 -13.9 -67.7 7
Residential completions 35.4 21.7 3.8 11.8 -31.3 14.5 -67.2 30.2 -40.5 7
of which:
 Government-initiated
132.2 36.4 -7.9 -14.6 -24.5 36.9 -61.2 59.8 -41.2 7
Survey of companies (percent)
Net output
of manufacturing firmsb
3c -3c -2 -3c -5c -9 -13

9
Net sales
by commercial firmsb
-9c -13c -14c -16c -17c -16c -11c

9
*
Last month for which data available.
a
Compared with same period in preceding year.
b
Net balance defines as difference between the number of firms reporting a rise and those reporting a fall, as a percentage of all reporting firms.
c
Denotes non-significant result at 5 percent level.

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The Principal Industries

Economic indicators show that in the period reviewed-April to September 1998-the trends evident in 1997 intensified. Industrial production only moderately increased in 1998:II, after accelerating in 1998:I; investment in construction, especially residential, continued to fall; and commerce and tourism rose slowly. Transport and communications rallied slightly, however. The Bank of Israel's quarterly survey of companies for 1998:III yielded similar findings regarding the trends: a reduction of activity in all industries, including manufacturing, construction, commerce, and tourism, the decline in transport and communications being more moderate. According to the survey, the main barrier to expansion in the different industries was slack domestic demand.

In April-August, the index of industrial production rose by 1.9 percent, annual rate, after rising by 7.1 percent in 1998:I. The numbers of employees and of hours worked in industry declined in 1998:II, and have not changed significantly since the beginning of the year. The increase in manufacturing, without a rise in the number of employees, was the result of a 3.5 percent rise in industrial labor productivity in the first half of the year. Stability in the number of employees and hours worked reflects the moderate level of economic activity and uncertainty regarding its future rate of growth. Both the rise in productivity and the real increase in wages in manufacturing may be partly explained by dismissals in labor-intensive industries and the movement of labor within and between industries into those where labor productivity is higher.

An analysis of the two-digit industries indicates that economic activity contracted in most of them in 1998:II, after accelerating in 1998:I. There was a notable difference between the rate of increase of production in high-tech and traditional industries. In the first half of 1998, the electronic equipment, transport vehicles, chemicals, rubber and plastic industries increased by an average of 9 percent over the first half of 1997, whereas the traditional industries-textiles, clothing and leather, food and beverages, tobacco, and wood, furniture, paper and print-rose by less than one percent. Activity in mining and non-ferrous metals declined by 8 percent in the first half of 1998, apparently due to the effect on mining of the moderation of construction activity.

In September, industrial exports (seasonally adjusted) were about 9 percent lower than in 1998:I. After increasing by a monthly average of 2.7 percent from January to April, the trend reversed, and in May-September industrial exports declined by an average of 2.8 percent per month. The decline in exports appears to have been due to the fall in world demand resulting from the international financial crises and their effects on the level of world trade. Exports to East Asia have been falling since the beginning of the year, as have those to Russia and South America since May, while the rate of increase of exports to other countries has slowed (for details, see the sections on the Balance of Payments and International Developments).

The main indicators in the construction industry show that there was a further considerable slowdown in activity compared with the equivalent period in 1997. In April-July there were 56 percent fewer building starts than in the equivalent period in 1997, the main decline being in the public sector, and the number of completions went down by 40 percent. On the demand side, the number of mortgages taken up was 12 percent lower in 1998:II than in 1997:II, and the number of new mortgages reached its lowest level since the start of the influx of immigrants. There was a decline in the number taking up loans in all categories of persons eligible for mortgages, inter alia reflecting expectations of a revision in August of the law relating to mortgages; most of the fall was among immigrants. As a result, there were 13 percent fewer purchasers in 1998:II than in 1997:II (based on data provided by the 10 largest contractors).

A number of recent events are expected to have a positive effect on the construction industry. The Mortgage Law-which grants benefits and aid to some eligible persons-came into force in August, and as the market rate of interest came down, so did the interest on mortgages, by about one percent. The result of the depreciation which started in August is as yet unclear: on the one hand, it causes housing prices to rise in the short term, while on the other, it raises rents and thus makes the purchase of an apartment more attractive. At this stage, part of the slowdown in the market may be due to potential buyers postponing purchases because of uncertainty regarding the future development of prices.

Commercial activity remained modest in comparison with its level in 1997; in April-August the revenue index remained at the same level as in the equivalent period in 1997, while the retail trade index rose relatively rapidly, by 6.4 percent. Tourism, too, showed a relatively low level of activity: the number of tourist arrivals in April-July remained stable, and the number of bed-nights of tourists and Israelis were 2.5 percent and 4.4 percent higher, respectively, than those of April-July 1997.
 

Figure 5. Tourism (index, average 1989=100)

Table 2. National Accounts, 1996-98
(seasonally adjusted)


1997
1998
Apr-Septa
*

1996
1997
III
IV
I
II
III
1997
1998
Rates of change (average annual rates, percent, constant prices), compared with preceding quarter
GDP 4.6 2.2 1.6 1.6 2.0 1.6
2.7 1.8 6
Business-sector product 5.4 1.9 0.0 3.6 0.4 0.4
2.8 1.1 6
Private consumption 5.0 4.0 0.8 -1.6 4.1 7.4
5.4 2.6 6
Gross domestic investment 9.5 -3.3 -20.9 29.6 -22.5 -26.8
-4.2 -12.7 6
Goods and services exports 5.0 7.2 11.7 -12.2 7.8 28.1
10.4 8.0 6
Goods and services imports 6.9 2.6 -3.2 -2.8 -1.2 11.2
6.5 0.9 6
Public-sector product
3.7 1.4 4.1 -1.2 7.8 2.0
1.5 3.0 6
*
a
Last month for which data available.
Compared with same period in preceding year.

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The Labor Market

Employment in 1998:II reflected the moderation of demand and slower rate of GDP growth, continuing the trends evident since the second half of 1996. The civilian labor force expanded faster than did the number of employees, 2.4 percent and 0.3 percent respectively compared with 1997:II, so that unemployment rose to 9.4 percent, and the number of jobless went up to 213,0002. The rise in unemployment and the number of those out of work accelerated in the first half of 1998 compared with the equivalent period in 1997, apparently as a result of a) the greater slowdown in the level of economic activity, b) the relatively long period in which GDP growth slowed, and c) the adjustment by employers of their expectations regarding the future rate of growth. On the other hand, trend data indicate that the unemployment rate was stable from April to August.

The number of Israelis employed in the business sector in April-July was 1.5 percent lower than in the same months in 1997, while in the public sector their number increased by 4.9 percent. Industry by industry, employment followed the same pattern as has been evident since 1996: the slowdown was most notable in construction and manufacturing (except for the high-tech industries), whereas in commerce, transport and communications and most service industries the number of employed persons actually increased. In addition to the moderating effect of slow growth on the increase in the number of employed persons, two long-term structural changes also appear to have played a part in the last few years, continuing to do so in 1998:II. The first is the rising share of service industries, commerce, and transport and communications, a development which is connected with the rise in the standard of living despite the fall in per capita GDP. The second change-the transition from traditional to high-tech industries-is evident mainly in manufacturing, and is characteristic of countries with a comparative advantage in human capital.

The real average wage per employee post was 3.9 percent higher in 1998:II than in 1997:II-4.9 percent in the business sector and 1.7 percent in the public sector. The highest rise was in manufacturing, where the wage rose by 6.7 percent. The large wage increases in the business sector were due to the rise in labor productivity, resulting from dismissals of workers at low wage levels and the change in the composition of employment by industry, the shortage of workers in some, mainly high-tech, industries, and the greater drop in inflation than was expected at the time when the wage agreements were signed. The legal minimum wage was raised by 8.5 percent in April. The effect of this adjustment was reflected mainly in the average wage in the traditional industries, a relatively large number of whose employees are earning the minimum wage, while in the business sector as a whole the effect was minimal. Negotiations on public-sector wage agreements which expired towards the end of 1997 continued during 1998. In the wake of a strike by public-sector employees, agreements were signed for some segments in this sector (see the section on the Government for details).

Unemployment continued to rise: in 1998:II it reached 9.4 percent, up from 8.7 percent in 1998:I and an average of 7.7 percent in 1997. Indicators show that unemployment deepened: the share of the unemployed who had been looking for jobs for more than 27 weeks rose from 23.7 percent in 1998:I to 25.7 percent in 1998:II, while the share of those seeking employment for less than 8 weeks went down from 42 percent in 1998:I to 39.3 percent in 1998:II. The rate of unemployment among immigrants who arrived in Israel after 1990 was 11.6 percent in 1998:II, compared with 11.0 percent in 1997:II. In 1998:II immigrants constituted about a fifth of the number of unemployed, and 15 percent of the number of employed persons. Trend data for August indicate that the unemployment rate has stabilized at about 8.8 percent in recent months.

2 The number of work-seekers also rose in 1998:II, but a mohth by month analysis shows that the most significant feature was the stability evident since March, and a slight decline in July. These data should be viewed with caution, as not only do they represent a significant drop in the number of work-seekers, but also the more rigorous enforcement of the rules by the National Insurance Institute, keeping a closer record of unemployed persons refusing jobs offered to them, and increasing vocational retraining.


Figure 6. The labor market (thousands)
Figure 7. Real wage per employee post (NIS, 1995 prices)
 
 

Table 3. Indicators of Labor Market Developments, 1996-98
(seasonally adjusted)


1997
1998
Apr-Septa
*

1996
1997
III
IV
I
II
III
1997
1998
('000s)
Civilian labor force 2,157 2,206 2,220 2,226 2,259 2,257
2.1 2.4 6
Israelis employed 2,014 2,039 2,042 2,055 2,063 2,044
0.9 0.3 6
   Business sectorb
1,436 1,446 1,461 1,448 1,435 1,435
0.9 -1.5 6
   Public sectorb 577 594 588 606 621 613
0.6 4.9 6
Average hours worked
per employee
b

38 38 38 38 37 37
1.6 -2.1 6
Claims for
unemployment benefit
75 97 99 103 107 111 110 31.6 14.3 9
Work seekers 78 99 99 104 108 111 107 29.5 7.1 9
Real wage per employee post (NIS)c 4,282 4,390 4,405 4,430 4,506 4,539 4,518 3.4 3.1 7
   of which: Business sectorc
4,255 4,414 4,442 4,451 4,555 4,637 4,652 5.0 4.2 7
Unemployment rate (%) 6.7 7.7 8.0 7.7 8.7 9.4


6
*
Last month for which data are available.
a
Percent change compared with same period in preceding year.
b
Not seasonally adjusted.
c
1994=100.

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The Balance of Payments

The current-account deficit in 1998:II totaled some $ 540 million, 60 percent lower than its level in 1997:II. The decline was due mainly to the 25 percent reduction in the import surplus from its 1997:II level, itself deriving from a similar decline in the deficit on the trading account and a reduction in the deficit on the services account. Due to the sharp drop in the inflow of long- and medium-term capital in 1998:II to a low level of $ 560 million, and a reversal of the direction of the flow of short-term capital (outside the banking system) to an outflow of $ 200 million, only part of the current-account deficit was financed by capital inflow, and the rest by a $ 300 million reduction in the Bank of Israel foreign reserves, mainly due to public-sector activity.

The trade deficit (excluding ships, aircraft, fuel, and diamonds, seasonally adjusted) shrank by 14 percent in the period under review compared with the equivalent period in 1997. The downward trend halted in June, however, after which merchandise imports increased slightly from their average level in 1997, and merchandise exports, after rising from the beginning of the year, decreased from May to September by a cumulative 14 percent. Exports to South America and to Russia declined for the first time in 1998:III, and the reduction in exports to East Asia and Japan continued. The rate of increase of exports to other countries also slowed as a result of the financial crises.

Merchandise imports, seasonally adjusted, crept up by 0.5 percent in the period reviewed from their average in 1998:I, and exports fell by about 1 percent. The decline in exports which started in May was due mainly to industrial exports, specifically of machinery and equipment and food (Russia accounted for 10 percent of Israel's total food exports). Activity in the diamond industry eased very considerably, because of the continued crisis in East Asia and Japan-major markets in the diamond trade. The dollar price of merchandise imports went down by 0.5 percent in 1998:II, and the price of exports by about 2 percent, so that after an improvement in the terms of trade in the previous six months, there was a deterioration in the second quarter.

In 1998:II, repayments of medium- and long-term loans exceeded new loans. The reduction of loans reflected a decline (of $ 176 million) in net public-sector borrowing, while the private sector borrowed a modest $ 134 million. The decline in public-sector loans followed the borrowing of $ 1.5 billion in 1998:I within the framework of the US guarantees. Nonresidents' financial investments in Israel were affected by the volatility and instability of the domestic and international financial markets, mainly in 1998:III. Financial investments in 1998:II totaled $ 0.5 billion, and in 1998:III investments of $ 170 million were repatriated abroad, compared with investments of $ 1.5 billion in the same six months in 1997. Foreign direct investment amounted to $ 400 million in the period reviewed, compared with $ 600 million in the equivalent period in 1997. These developments were also reflected by a slowdown in privatization and the paucity of new offers on the New York Stock Exchange in the period reviewed.


Figure 8. Rate of Changeof Exports, Compared With Equivalent Period in 1997
Figure 9. Rates of Exchange of Selected Currencies Against US$ January 1997 - September 1998 ($/other currency, January 1997=100)
Figure 10. Foreign trade ($million per month)

Table 4. Balance of Payments, Foreign Tradea, and the Reserves, 1996-98
($ mill., current prices)


1997
1998
Apr-Sept
*

1996
1997
III
IV
I
II
III
1997
1998
Monthly averages
Trade deficit 660 476 443 473 371 348 438 459 393 9
Goods imports 1,853 1,775 1,779 1,799 1,761 1,778 1,765 1,758 1,771 9
   Consumer goods 328 322 312 322 325 318 335 319 326 9
   Capital goods 420 382 414 377 352 378 367 384 373 9
   Intermediates 1,104 1,070 1,053 1,100 1,084 1,081 1,063 1,055 1,072 9
Goods exports 1,193 1,299 1,336 1,326 1,390 1,430 1,326 1,300 1,378 9
   Manufacturing 1,124 1,230 1,265 1,259 1,324 1,359 1,252 1,231 1,306 9
Quarterly averages
Net current account -1,277 -809 -1,075 96 -653 -573
-1,176   6
Long- and medium-term
capital flows
1,213 1,299 2,265 573 1,729 383
1,763   6
   of which: Private sector 803 993 1,512 1,097 651 560
1,652   6
Short-term capital flowsb 430 1,284 -485 -745 -157 46
846   6
   of which: Private sectorb 221 1,296 -427 -776 -93 11
858   6
Net foreign debt (% of GNP) 20.01 18.17 20.08 17.17 18.10 17.92
29.21   6
End-period Bank of Israel reserves 11,575 20,332 19,206 20,332 21,603 21,322 21,715 17,761 21,560 9
*
Last month for which data are available.
a
Foreign trade data are seasonally adjusted monthly averages (excluding ships, aircraft, diamonds, and fuel).
b
Including the banking system.

Top



International Developments
and Their Effect on Israel

The financial crisis that erupted in June 1997 was concentrated in the banking systems of East Asia, principally Thailand, Indonesia, Malaysia, the Philippines, and South Korea (see box). After the financial markets stabilized at the beginning of 1998, another round of devaluations and share price declines emerged in the countries affected in May and June 1998. These later devaluations were smaller than those of 1997, but this time Russia was also affected by the crisis.

The turmoil in Russia was triggered by the uncertainty and instability arising from the devaluations in East Asia and the drop in goods prices in Russian markets. In the wake of domestic political and economic turbulence, however, the crisis in Russia developed a dynamic of its own. Thus, in the two month period of July-September the value of the rouble fell by about 150 percent against the dollar, along with a moratorium on the national debt. The devaluation in Russia led to further declines in world stock markets, a higher assessment of risk by investors and a rise in caution-as occurred in developed countries too-as well as to credit and liquidity difficulties in financial markets. These developments exacerbated the situation of countries with a significantly large current-account deficit financed by short-term credit; these included several South American countries, especially Brazil, which had to raise its interbank interest rate from 19 to 40 percent in September in order to support its currency. As a result, Brazil's share-price index fell by 45 percent in September. In the last few months the IMF has decided to extend a rescue package to countries in difficulties, including Russia and Brazil. Interest rates have been reduced in many countries in order to enable them to emerge from the crisis.

Last year's crisis in East Asia caused international agencies to adjust their assessments of growth rates and world trade in 1998 and 1999. Because of developments in the summer of 1998 these forecasts had to be adjusted again (Table 5). Expectations of a decline in world demand also led to the moderation of the estimated rise in inflation and prices of raw materials and fuel. The economic stabilization of Japan is important for forecasts of growth and the extent of world trade, as it is a major hub of international trade and also because its stock market is one of the world's largest financial centers. Despite Japan's relative stability, it has also been affected by the economic crisis, experiencing its worst recession since the Second World War in the second half of 1997.

Apart from its direct effect on financial markets in Israel, the crisis was also felt in the real markets, particularly exports. In the first half of the year exports to East Asia fell, but although these markets are an important destination for Israel's exporters, the extent of exports to them is small, and is not enough in and of itself to cause exporters to fail. The turmoil in the markets, fall in prices, and decline in exchange rates appears to have impelled exporters to find alternative destinations. Thus, although exports to Asia have fallen, total exports have risen. This rise, like the diversion of imports to cheaper sources and improvement in Israel's terms of trade due to the decline in the price of fuel and other raw materials, led to the reduction of Israel's import surplus in the first half of 1998. Since the beginning of the year, however, world growth rates have slowed and international trade has declined; these trends have been further exacerbated by the cumulative effect of the turmoil in East Asia, its aggravation during the course of the year, and developments in Russia. Thus, since 1998:lll Israel's exports have suffered, and the decline in the balance-of-payments deficit has been checked.

On the financial markets there was a steep drop this year in international capital flows to developing countries in general, and in foreign financial investment in particular-especially to Israel. However, the cautious macroeconomic policy of the last two years, together with the maintenance of fiscal and monetary discipline, has helped to minimize the impact of the financial crisis on Israel, and may even have made investment in Israel more attractive than in other countries.

In the last two years, including the period reviewed, there has been a high correlation between trends in stock markets in developed countries throughout the world and in Israel3. The considerable volatility of the financial markets in September and October was felt in the 17 percent fall in the share-price index during that period, and by the 16.5 percent depreciation of the NIS, with considerable fluctuations. Most of the depreciation of the NIS and the decline in the share-price index occurred in October, following steep falls in share prices in the US and Europe (see below). The substantial depreciation of the NIS in August-October could give rise to financial pressures on the banking system and credit-taking firms, as foreign-currency credit swelled to 30 percent of total credit in July 1998.

3 Between June and September the correlation coefficient between the total return on the S&P 500 and Israeli's shareprice index (which is a total return index) was 0.72.

Chronology of an International Financial Crisis

July 1997
Thailand is forced to abandon the exchange rate of the baht against the dollar. The baht is immediately devalued by 20 percent and continues to decline. Thailand requests help from the IMF.
The Philippine peso loses 10 percent of its value against the dollar; the Malaysian ringgit and Indonesian rupiah are devalued; stock markets in the region plummet.
Control of Kia, the eighth largest company in South Korea, is taken over by a consortium of banks. Kia is the fourth of thirty large companies to fall.

August 1997
Indonesia abandons its fixed exchange rate against the dollar. Stock markets in the region plummet; for the first time Hong Kong was also affected.
The IMF holds a conference in Tokyo to discuss the crisis in Thailand. The participants pledge aid of $ 17 billion.

October 1997
The Hong Kong stock market loses 40 percent of its value in one month.
World stock markets plunge. The Dow Jones index loses 554 points.

November 1997
The Thai government resigns.
Yamachi, the fourth largest brokerage company in Japan, collapses with debts of $ 25 billion.

December 1997
The IMF approves a $ 21 billion credit line for Korea.

January 1998
The IMF approves a $ 43 billion aid package for Indonesia.

February 1998
The Governor of Indonesia's central bank is dismissed.
The Japanese government adopts a $ 230 billion emergency plan to rescue the banks.

May 1998
Devaluations in Indonesia, Korea, and Thailand.
Share prices fall in South East Asia following announcements that economic growth rates will be lower than expected; for the first time the problems in Asia cause share prices to fall in Russia.
Russia's central bank raises the interest rate from 30 to 150 percent.

June 1998
Devaluations in Indonesia, Malaysia, the Philippines, and Thailand.
Official publication of figures in Japan indicating recession causes share prices to plummet worldwide.

July 1998
The Russian government announces an economic recovery plan.
The IMF pledges an economic aid package of $ 17 billion for Russia.

August 1998
The Russian government announces the unilateral cessation of its debt payments to the West, and freezes repayments of Treasury bonds for the year. The rouble is devalued by 30 percent..
Russia's central bank announces the cessation of foreign-currency trading after the rouble depreciates by 40 percent against the dollar. Stock markets all over the world go into free fall.
President Yeltsin sacks the Russian cabinet.

September 1998
After the roubles loses 50 percent of its value in two weeks, Russia is obliged to abandon its fixed exchange-rate regime and move to a floating exchange rate against the dollar.
The Brazilian stock market plummets, and there is extensive capital outflow.
Interest rates are reduced in the US, Japan, and elsewhere.

October 1998
In the wake of the approval of the financial-sector recovery plan the dollar depreciates by 11.5 percent against the yen-the widest fluctuation in the last twenty-five years.
The government of Brazil agrees to introduce far-reaching economic changes, to receive IMF aid of $ 30 billion.

Table 5. Indicators of Economic Development in Advanced and Developing Countriesa, and Estimate for 1998-99

  Difference between estimates
  Estimates Oct 1998
/
Oct. 1997
Oct 1998
/
May 1997

1996 1997 1998 1999
Annual rate of changeb
World GDP
   Total 4.2 4.1 2.0 2.5 -2.3 -1.1
   Advanced countries 3.0 3.1 2.0 1.9 -0.9 -0.4
   Developing countries 6.6 5.8 2.3 3.6 -4.0 -1.8
World trade
   Total 6.8 9.7 3.7 4.6 -3.1 -2.7
   Advanced countries
      Imports 6.4 9.0 4.5 4.7 -1.9 -2.3
      Exports 6.0 10.3 3.6 4.2 -3.0 -2.6
   Developing countries
      Imports 9.3 9.8 1.0 4.6 -6.8 -4.2
      Exports 8.8 10.9 3.9 5.5 -3.3 -3.5
Inflation (CPI) </TD<
   Advanced countries 2.4 2.1 1.7 1.7 -0.6 -0.4
   Developing countries 14.4 9.1 10.3 8.3 1.5 0.1
Short-term interestc (%)
   Dollar deposits 5.6 5.9 5.7 5.7 -0.4 -0.4
   Yen deposits 0.7 0.7 0.7 0.6 0.0 0.0
   DM deposits 3.3 3.4 3.7   -0.1 -0.2
Unemployment rate
   OECD countries 7.3 7.1 7.0 6.9   0.0
a
According to "World Economic Outlook", Israel is classified as an advanced country.
b
Apart from interest and unemployment rates, which are shown as percentages.
c
3-month LIBOR rate.
SOURSE: "World Economic Outlook", (IMF).


Top



Prices

In May-September the CPI rose moderately, after increasing relatively rapidly in April, mainly in connection with the local-currency depreciation that month, but also with seasonal factors. In September price increases accelerated, largely due to the cumulative effect of the depreciation evident since August. Thus, during the period reviewed the CPI rose at an annual rate of 8.1 percent, while the CPI adjusted for housing, fruit and vegetables, items whose prices are controlled, clothing and footwear rose by 5.3 percent, and the wholesale price index went up by only 2.3 percent

In the last few years monetary policy has served to dampen inflation within the framework of the pre-set annual targets. As a consequence of this policy, and in view of the slowing of the growth rate of domestic demand, fiscal restraint, and the persistent decline in import prices, the rate of price increases fell to 5.4 percent (annual rate) in 1998 (up to September) The acceleration of the rate of price increases in the period reviewed is connected principally with exchange-rate developments, as the NIS depreciated against the dollar by about 15 percent, as well as with steep increases in prices of fruit and vegetables, as well as clothing and footwear. In April the NIS depreciated sharply against the dollar-by 3.3 percent-while in May this was partly offset by the 1.1 percent appreciation. Between the end of July and the end of the third week in October the NIS depreciated by 19.1 percent against the dollar (for an account of the depreciation, see the section on the Money and Capital Markets). As a result, the April CPI rose by 1.4 percent and that for September went up by 1.3 percent. While the sharp rate of price increases in April can be regarded as being due to a one-time event (the effect of which was offset in the subsequent months), which has not had a significant effect on inflation expectations, the effect of the depreciation in August-September, and especially that of October, is not yet clear.

Expectations of inflation (derived from the capital market, gross) reveal a rising trend in 1998:lll compared with a decline in 1998:l. In April-July expectations for 12 months ahead were 5 percent. Note that despite the relatively sharp rise in the April CPI there was no significant change in expectations that month. In August and September expectations rose to the lower limit of the inflation target-7 percent-a rise which is also connected with the increase in the risk premium in the context of the recent volatility and instability of the financial markets. Inflation expectations moderated to 6 percent as demand pressures on the foreign-exchange market abated in the second half of September and the first week of October, then rose to 11 percent in the second week of October, after demand for foreign exchange soared again, bringing depreciation in its wake. At the end of October expected inflation reverted to 7 percent as a result of expectations that the Bank of Israel would raise the interest rate.

Import prices declined by 1.5 percent (dollar terms) in 1998:ll, reflecting the fall in prices of consumer goods and of raw materials and fuel. The decline in the dollar prices of imports is a continuation of the trend that has characterized these prices in the last few years, and this intensified after the international crises. Real developments created an appropriate environment in Israel for real depreciation, or at least the moderation of the real appreciation which has been in evidence in recent years. The gap between the prices of traded and nontraded goods in the CPI has indeed narrowed, especially when the CPI is adjusted for seasonal factors. The price index of traded goods (excluding clothing and footwear) rose by 4.9 percent in the period reviewed, while that of nontraded goods (excluding fruit and vegetables) rose by 6.2 percent. A similar picture is obtained from a comparison of export prices and the implicit price index of GDP; despite fluctuations in data, the trend of the moderation of real appreciation is evident throughout 1997 and 1998. The index of export prices (according to National Accounts data) rose by about 10 percent in the first half of the year, and that of domestic uses of resources went up by some 13 percent.

An analysis of the items comprising the CPI shows a marked slowing in the rate of increase of the price of housing, which is considerably influenced by Israel's business cycle. During the period reviewed the housing index rose by 8.4 percent vis-a-vis the same period in 1997, apparently because of the direct effect of the exchange rate on housing prices, despite the slowdown in construction activity. Prices of fruit and vegetables and of clothing and footwear also rose sharply; fruit and vegetables rose by 52 percent in the period reviewed, most of the increase being due to damage to harvests caused by the summer weather. Prices of clothing and footwear rose by 30 percent during the period reviewed, largely because of seasonal price increases.
 


 
Table 6. Selected Price Indicies, 1996-98
(annual rates of change during period, percent)


1997
1998
Apr-Sept
*

1996
1997
III
IV
I
II
III
1997
1998
CPI 10.6 7.0 5.4 2.4 0.3 8.9 7.4 7.5 8.1 9
CPI excl. housing, fruit and vegetables 10.1 6.7 5.2 4.8 -0.5 10.0 2.2 8.0 6.0 9
CPI excl. housing, fruit and vegetables, controlled goods, clothing & footwear 10.2 7.8 10.9 2.7 3.0 4.4 6.1 9.2 5.3 9
Index of housing prices 13.2 7.5 7.7 -1.9 5.1 3.9 13.1 9.2 8.4 9
Wholesale price index 7.0 5.9 7.8 2.5 -0.6 4.1 0.6 7.5 2.3 9
NIS/$ exchange rate 5.0 7.9 6.5 3.1 6.0 9.0 21.2 8.6 14.9 9
NIS/currency-busket rate
3.0 3.7 1.0 3.6 3.6 8.9 28.7 6.0 18.4 9
*
Last month for which data are available.

Top



The Government

During the period reviewed the domestic deficit excluding net credit (cash data) stood at 1.8 percent of GDP. From January to August 1998 the deficit was NIS 4.7 billion, compared with NIS 3.3 billion in the same period in 1997 and with the deficit of NIS 8.4 billion planned in the National Budget. A comparison of actual and planned income and expenditure shows a serious shortfall in income4 and under-implementation with regard to expenditure. The shortfall in income4 derives from a drop in tax revenues, primarily due to the low level of economic activity, as well as from the failure to implement the plan to extend the tax base and to bring the rate of growth of revenues into line with the relatively moderate rate at which prices rose. The lag in expenditure is fully explained by the difference between the expected and actual price increases.

The public-sector deficit (including the Bank of Israel and the Jewish Agency) stood at 2.4 percent of GDP during the period reviewed, The path to date indicates that the total budget deficit in 1998 will be in the region of the target-2.4 percent of GDP. The financing of the public-sector deficit during the period reviewed was based on primarily on net borrowing from the public of 2.1 percent of GDP.

Tax revenues in 1998:ll were 3 percent higher in real terms than in 1997:ll. Alongside the real rise in wages, direct taxes also increased by a substantial 6 percent. The real rate of increase of indirect taxes was 3 percent, whereas import taxes fell by 5 percent. Unilateral transfers to households rose by 1 percent in 1998:ll; about one third of the increase in unilateral transfers is explained by the growth of pension payments to retirees and dependents, and another third by the increase in unemployment and disability benefits (each accounting for an equal share).

Negotiations on public-sector wage agreements, which expired towards the end of 1997, continued throughout the year. After a strike by public-sector employees from 3rd to 8th August, and an 8-day strike by teachers at the start of the school year, wage agreements were signed with the teachers, airport employees, and university teachers. Negotiations with the unions which are members of the Federation of Labour (Histadrut) were only partly concluded, however. Another important problem-the cumulative deficit in the health system-has not yet been resolved.

4 Smoothing revenues.
 

Figure 11. Government cash flows (NIS million, monthly average)
 
Table 7. The Budget and its Financing, 1996-98
(cash flows, as percent of GDP)


1997
1998
Apr-Sept
*

1996
1997
III
IV
I
II
III
1997
1998
1. Government domestic expenditure 40.7 39.7 38.9 41.4 40.7 36.9 37.7 38.0 37.3 9
2. Government receipts 36.0 36.8 37.3 34.6 39.1 35.3 35.7 36.0 35.5 9
3. Domestic budget deficit (1)-(2) -4.7 -2.9 -1.7 -6.8 -1.5 -1.6 -2.0 -2.0 -1.8 9
4. Public-sector domestic deficita  (5)+(6) 5.4 3.3 2.3 7.2 1.4 2.2 2.7 2.2 2.4 9
5. Government net borrowing from the public 2.6 2.3 1.3 -1.0 1.4 1.5 2.6 2.9 2.1 9
6. Public-sector injection (9)-(8)-(7) 2.8 1.0 0.9 8.2 0.0 0.7 0.1 -0.7 0.4 9
7. Bank of Israel injection
-3.5 -6.7 -0.5 -4.0 -3.2 0.1 2.6 -3.7 1.4 9
8. Private-sector foreign-currency conversions 1.9 6.7 -0.1 0.0 1.7 -0.1 -0.2 5.1 -0.2 9
9. Change in monetary base
1.3 1.1 0.3 4.2 -1.5 0.6 2.5 0.8 1.6 9
* Last month for which data available.
a Budjet deficit plus Jewish Agency injection, plus non-budgetary injection.


Top



The Money and Capital Markets

In view of assessments regarding a significant decline in the inflation environment from 1997:lV, inter alia because of the effect of real developments, the interest rate was reduced by a cumulative 3 percentage points in the period reviewed. The process of reducing the interest rate was implemented with particular care because of the need to reduce risk in the domestic financial markets in the context of the financial turmoil and instability in many developing countries. Nonetheless, since August, till when Israel's financial market had been relatively stable, there was considerable depreciation of the NIS and the share-price index plummeted.

The Bank of Israel reduced interest by 4 percentage points from the beginning of the year, so that by September it averaged 9.6 percent. Most of the reductions-3 percentage points-occurred during the period reviewed. In April-July the rate was reduced slightly. In August, in view of assessments that the inflation environment had declined significantly, the inflation target for 1999 was set at 4 percent, the slope of the lower limit of the exchange-rate band was reduced from 4 to 2 percent, and the Bank of Israel reduced the interest rate by 1.8 percentage points. Towards the end of October it raised interest by 2 percentage points in the wake of developments in the financial markets (see below). The lack of stability in international financial markets, and the narrowing of interest-rate differentials, appears to have increased uncertainty and the assessment of exchange-rate risk in Israel. All of these factors combined to create a new environment for the activity of the financial market in Israel from August, leading to the fuller internalization of risks and volatility.

Because of the slow adjustment of the nominal interest rate and the decline in inflation expectations, real interest5 rose by some 7 percent from March to July. In August and September, because of the combination of a decline in nominal interest and a rise in expected inflation, real interest fell from this level to about 4 percent. Note that the rise in expected inflation in these months also appears to reflect the rise in the risk premium demanded by investors in view of the uncertainty regarding the development of prices.

During the period reviewed the exchange rate of the NIS fluctuated widely. In April, against the backdrop of the uncertainty that accompanied expectations of the announcement of another stage in the liberalization of foreign exchange, the NIS depreciated sharply against the basket of currencies, which rose 4 percent above the lower limit of the exchange-rate band in the middle of the month, and fell to 2.7 percent at the end of the month. In May-July the exchange rate remained close to the lower limit of the band. In August, immediately after the reduction of the interest rate was announced, there was a 1.3 percent depreciation of the NIS against the currency basket. In September, against the backdrop of the turbulence on the world financial markets and the concomitant economic uncertainty, there was a further 3.7 percent depreciation against the currency basket exchange rate.

In October the NIS depreciated by 11.7 percent against the currency basket, and by 10.5 percent against the dollar, with considerable exchange-rate volatility and a 7 percent drop in the share-price index. The fall in the share-price index and the local-currency depreciation were the outcome of the combined activity of domestic investors, who acted to reduce their exposure to exchange-rate risk, and foreign investors, who sold domestic financial assets following sharp falls in share prices in Europe and the US and the volatility and instability of international markets. On October 26 the Bank of Israel raised the interest rate by 2 percentage points, to 11.5 percent. This was necessary in order to prevent the developments on the financial markets and the rise in the September CPI as well as that expected for October from being translated into rapid inflation, the erosion of the real depreciation, and the undermining of economic stability.

M1 increased by 23.4 percent during the period reviewed (until August), a rate that exceeds the growth rate of nominal GDP. The relatively sharp rise in M1, despite the fall in domestic demand, is explained to a great extent by the process of asset portfolio adjustment by the public in the wake of the reduction of interest, as well as by the greater demand for liquidity following the decline in the inflation rate in the last few months. The development of the other money aggregates until July also reflected the process whereby the public moved to a more liquid asset portfolio. Thus, during the period reviewed unindexed time deposits for up to 3 months rose by 23.2 percent, in annual terms, and those for over 3 months rose by 1.7 percent, while M2 grew by 22.8 percent in annual terms. Despite the local-currency depreciation, local-currency credit increased by 12.1 percent during the period reviewed, compared with a 17.3 percent rise in credit indexed to or denominated in foreign currency.

The general share-price index fell by 6.5 percent during the period reviewed. In April-July it rose at a moderate rate of 1 percent a month; in August, against the backdrop of international financial developments and instability, and in the wake of sales of local-currency financial assets principally by nonresidents, the share-price index fell by 9 percent; in September it fell by 2.1 percent, and in October it declined by another 6.9 percent, thus reaching the low level that characterized it in the first half of 1997. The decline in share prices occurred in the context of the international fall in share prices following the crisis in Russia and the uncertainty in world financial markets.

The slope of the curve of the yield to maturity of CPI-indexed bonds (gross) was negative until the end of July and turned positive in August, alongside a decline in yields to all terms of maturity, apparently due to fears that inflation would accelerate in the future and the rise in the risk premium. The curve of the yield to maturity of Treasury bills also switched trend; it was negative until July, apparently reflecting expectations of a fall in nominal interest against the background of the decline in the inflation rate, while after the 5 percentage-point reduction in interest in August the curve became flatter, and even slightly positive.
In view of assessments regarding a significant decline in the inflation environment from 1997:lV, inter alia because of the effect of real developments, the interest rate was reduced by a cumulative 3 percentage points in the period reviewed. The process of reducing the interest rate was implemented with particular care because of the need to reduce risk in the domestic financial markets in the context of the financial turmoil and instability in many developing countries. Nonetheless, since August, till when Israel's financial market had been relatively stable, there was considerable depreciation of the NIS and the share-price index plummeted.

The Bank of Israel reduced interest by 4 percentage points from the beginning of the year, so that by September it averaged 9.6 percent. Most of the reductions-3 percentage points-occurred during the period reviewed. In April-July the rate was reduced slightly. In August, in view of assessments that the inflation environment had declined significantly, the inflation target for 1999 was set at 4 percent, the slope of the lower limit of the exchange-rate band was reduced from 4 to 2 percent, and the Bank of Israel reduced the interest rate by 1.8 percentage points. Towards the end of October it raised interest by 2 percentage points in the wake of developments in the financial markets (see below). The lack of stability in international financial markets, and the narrowing of interest-rate differentials, appears to have increased uncertainty and the assessment of exchange-rate risk in Israel. All of these factors combined to create a new environment for the activity of the financial market in Israel from August, leading to the fuller internalization of risks and volatility.

Because of the slow adjustment of the nominal interest rate and the decline in inflation expectations, real interest5 rose by some 7 percent from March to July. In August and September, because of the combination of a decline in nominal interest and a rise in expected inflation, real interest fell from this level to about 4 percent. Note that the rise in expected inflation in these months also appears to reflect the rise in the risk premium demanded by investors in view of the uncertainty regarding the development of prices.

During the period reviewed the exchange rate of the NIS fluctuated widely. In April, against the backdrop of the uncertainty that accompanied expectations of the announcement of another stage in the liberalization of foreign exchange, the NIS depreciated sharply against the basket of currencies, which rose 4 percent above the lower limit of the exchange-rate band in the middle of the month, and fell to 2.7 percent at the end of the month. In May-July the exchange rate remained close to the lower limit of the band. In August, immediately after the reduction of the interest rate was announced, there was a 1.3 percent depreciation of the NIS against the currency basket. In September, against the backdrop of the turbulence on the world financial markets and the concomitant economic uncertainty, there was a further 3.7 percent depreciation against the currency basket exchange rate.

In October the NIS depreciated by 11.7 percent against the currency basket, and by 10.5 percent against the dollar, with considerable exchange-rate volatility and a 7 percent drop in the share-price index. The fall in the share-price index and the local-currency depreciation were the outcome of the combined activity of domestic investors, who acted to reduce their exposure to exchange-rate risk, and foreign investors, who sold domestic financial assets following sharp falls in share prices in Europe and the US and the volatility and instability of international markets. On October 26 the Bank of Israel raised the interest rate by 2 percentage points, to 11.5 percent. This was necessary in order to prevent the developments on the financial markets and the rise in the September CPI as well as that expected for October from being translated into rapid inflation, the erosion of the real depreciation, and the undermining of economic stability.

M1 increased by 23.4 percent during the period reviewed (until August), a rate that exceeds the growth rate of nominal GDP. The relatively sharp rise in M1, despite the fall in domestic demand, is explained to a great extent by the process of asset portfolio adjustment by the public in the wake of the reduction of interest, as well as by the greater demand for liquidity following the decline in the inflation rate in the last few months. The development of the other money aggregates until July also reflected the process whereby the public moved to a more liquid asset portfolio. Thus, during the period reviewed unindexed time deposits for up to 3 months rose by 23.2 percent, in annual terms, and those for over 3 months rose by 1.7 percent, while M2 grew by 22.8 percent in annual terms. Despite the local-currency depreciation, local-currency credit increased by 12.1 percent during the period reviewed, compared with a 17.3 percent rise in credit indexed to or denominated in foreign currency.

The general share-price index fell by 6.5 percent during the period reviewed. In April-July it rose at a moderate rate of 1 percent a month; in August, against the backdrop of international financial developments and instability, and in the wake of sales of local-currency financial assets principally by nonresidents, the share-price index fell by 9 percent; in September it fell by 2.1 percent, and in October it declined by another 6.9 percent, thus reaching the low level that characterized it in the first half of 1997. The decline in share prices occurred in the context of the international fall in share prices following the crisis in Russia and the uncertainty in world financial markets.

The slope of the curve of the yield to maturity of CPI-indexed bonds (gross) was negative until the end of July and turned positive in August, alongside a decline in yields to all terms of maturity, apparently due to fears that inflation would accelerate in the future and the rise in the risk premium. The curve of the yield to maturity of Treasury bills also switched trend; it was negative until July, apparently reflecting expectations of a fall in nominal interest against the background of the decline in the inflation rate, while after the 5 percentage-point reduction in interest in August the curve became flatter, and even slightly positive.

5 The nominal interest rate on 1-year Tresury bills adjusted for gross expected inflation.
 

Figure 12. Selected Share Indicies, January 1997 - September 1998
Figure 13. Monetary aggregates and credit (change in prev. 12 months)
Figure 14. Nondirected bank credit (NIS million per month)

Table 7. Monetary Indicators and Nondirected Bank Credit, 1996-98
(annual terms, percent)


1997
1998
Apr-Sept
*

1996
1997
III
IV
I
II
III
1997
1998
Rates of change Average
Compared with preceding quarter
During perod
M1a
14.9 14.3 28.5 -1.3 5.3 17.2 25.4 25.6 23.4 8
M2b 27.0 25.8 24.9 25.0 31.3 13.0 30.4 22.1 22.8 8
M3c 27.2 25.3 24.0 20.9 28.6 15.7 21.6 20.0 21.0 8
Nondirected bank credit 21.6 18.2 18.0 13.2 9.9 18.5 14.0 19.9 17.3 8
   Unindexed local-currency 10.6 8.6 8.8 24.0 10.8 21.6 21.4 10.6 22.7 8
   CPI-indexed 23.7 19.0 15.9 18.5 8.8 10.9 14.2 15.2 12.1 8
   Foreign-currency indexed & denominated 40.0 32.3 33.5 -4.8 10.2 25.0 4.7 40.3 17.3 8
*
Last month for which data available.
a
Narrow money supply (cash in the hands of the public and demand deposits).
b
M1 plus short-term local-currency deposits.
c
M2 plus foreign-currency-indexed and denominated deposits.


Figure 15. The sheqel exchange rate against the currency basket
Figure 16. Yield on Treasury bills (end-period figures)

Table 9. Interest Rates, Yields, and the Share-Price Index, 1996-98


1997
1998
Apr-Sept
*

1996
1997
III
IV
I
II
III
1997
1998
Nominal interest
Nondirected local-currency credit 20.7 18.7 18.0 18.2 17.7 16.4 14.9 18.5 15.8 8
Average monetary loan 16.1 14.3 13.6 14.1 13.5 12.2 10.4 14.1 11.3 9
SROs 13.8 12.2 11.5 12.0 11.5 10.3 9.0 11.9 9.8 8
3-month Eurodollar 5.4 5.6 5.6 5.7 5.6 5.5 5.6 5.6 5.5 9
Yield to maturity on
Treasury bills 15.6 14.1 13.5 14.1 13.4 12.2 10.5 13.8 11.4 9
10-year bonds 4.5 4.0 3.7 3.9 4.7 4.9 4.8 3.9 4.9 9
5-year bonds 4.4 3.9 3.6 4.0 5.0 5.4 4.8 3.8 5.1 9
General share-price index (points) 92.4 129.2 139.4 133.1 131.5 146.4 139.9 132.6 143.8 8
*
Last month for which data available.