Investment of the Foreign Exchange Reserves

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The average level of the Bank of Israel's foreign exchange reserves in 2005 was about $27 billion, equal to some five months' worth of imports, and constituting about 82 percent of Israel's short-term foreign debt.

There was no change to the framework of the management of the reserves in 2005, which was based on the possible uses of the reserves and their benefit to the economy. The management framework will be reviewed again in 2006.

The holding period rate of return on the reserves in terms of the numeraire in 2005 was 2.6 percent, up from 1.7 percent in 2004. The return reflected the rise in yields to maturity in the capital markets in which the reserves were invested during the year, which led to rising interest income accompanied by capital losses.

In 2005 the holding period rate of return was 21 basis points higher than that of the neutral benchmark, a spread that reflects the contribution of active management of the portfolio. As in previous years, most of the incremental yield derived from asset selection.

The information ratio in 2005, more than 1.0, indicates a desirable yield/risk ratio.

The exposure of the reserves to the banking system was on average 31 percent of the reserves. This exposure is managed under a system of quotas and rules, which plays a central role in credit-risk management of the portfolio.

The reserves have a very high liquidity: about 84 percent of the portfolio is invested in liquid assets and the rest in assets with lower liquidity.