Trends in Foreign Currency Credit and Deposits of the Private Sector - 2003 to March 2007
Yehiel Rehavi

Abstract </TD
During the period under review, the Israeli economy was characterized by two main phenomena that led to a change in the structure of credit taken by, and the deposits of, the Israeli economy's private non-bank sector. The first was the significant narrowing of the spread between the shekel and dollar interest rates, which was the result of the lowering of the Bank of Israel's interest rate accompanied by a highering of the US Federal Funds rate. The second factor leading to the significant change in the credit and deposit structure was increased disintermediation. Locally, there was an increase in the volume of corporate bonds issued on the TASE while globally the Israeli economy continued its transformation into a more open economy and its integration within the globalization process (as a result of the foreign exchange liberalization in 1998 and the tax reform in 2005).
The drop in inflation and the reduction in the Bank of Israel interest rate led to lower interest rates on unindexed shekel credit while at the same time the interest rate on dollar credit increased. As a result, there were changes in the composition of credit with a decrease in the proportion of foreign currency credit. During the same period, the non-bank credit market underwent an expansion. Thus, Israeli corporations issued shekel bonds on the TASE that accounted for about 75 percent of the credit obtained by the private sector during the period under review. As a result, the share of the banks in total credit dropped from 89 to 73 percent during this period.
The changes in interest rates in Israel and abroad also had an effect on the volume of deposits. The interest rate on shekel deposits fell while that on dollar deposits increased, particularly in mid-2004. These two trends led to a reduction in the spread between the interest rate on unindexed shekel deposits and that on foreign currency deposits to the point that it became negative. As a result, foreign currency deposits with banks in Israel and abroad increased and the proportion of foreign currency deposits in total deposits grew from 24 to 30 percent during this period.
The decline in the interest rate spread and the lower volatility in inflation and the foreign exchange rate led to a reduction in speculative activity in credit and deposits.
Notably, the growth rate of credit was similar to that of GDP. Investment in deposits and foreign bonds also grew at a similar rate, which is an indication of the growth in real activity that accompanied the increase in financial activity.

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