Tuesday, January 29, 2013

Fischer Focus on Growth Helped Israel Beat World on Returns

(Bloomberg ) 

"He's done marvels in Israel," Nobel laureate Robert Solow, who taught with and then worked alongside Fischer at the Massachusetts Institute of Technology, said in a telephone interview. "He's played a terribly important role and I've no idea how they'll replace him."

Triggering the praise was the surprise announcement that the 69-year-old former International Monetary Fund No. 2 will step down June 30, midway through his second five-year term. He'll leave behind an economy that has rebounded from the global financial crisis faster than most peers and whose main stock index has outperformed its U.S. and European counterparts.

The challenge for Fischer's successor will be stepping into the shoes of a man who once served as thesis adviser to Federal Reserve Chairman Ben S. Bernanke, and who at the Bank of Israel broadened the focus to include growth as well as inflation. The first items on the agenda will be to prod Prime Minister Benjamin Netanyahu to shrink a budget deficit that grew to 4.2 percent of gross domestic product last year and to slow the rise in housing prices.

Responsible Adult

"Fischer was the responsible adult," Amir Kahanovich, chief economist at Clal Finance Brokerage Ltd. in Tel Aviv, said in a phone interview. "There is no doubt that foreign investors trusted him and the policies he put in place."

Israel, under threat of war from its neighbors since its foundation in 1948, produced better risk-adjusted returns than all other developed stock markets in the past decade as the technology-driven economy attracted global investors.

The BLOOMBERG RISKLESS RETURN RANKING shows the Tel Aviv TA-25 Index returned 13.4 percent in the 10 years ended Jan. 29 after adjusting for volatility, the highest among 24 developed- nation benchmark indexes. Israel beat the Oslo OBX Index (OBX), the next-best market with a risk-adjusted gain of 13.2 percent.

Israel outperformed as it fought a monthlong battle against Hezbollah in 2006, was involved in a similar conflict with Hamas two years later and is now threatened by Iran's nuclear program. International investors including Warren Buffett bought local companies. Under Fischer, gross domestic product expanded by 14.7 percent from 2009 to 2012, compared with 3.2 percent in the U.S. and a contraction of 1.5 percent in the euro region.

Rising Shekel

The shekel has surged 17.3 percent against the dollar since Fischer took office in May 2005, making it the second-best performer in Europe, the Middle East and Africa. Israel's Tel Aviv 25 Index (TA-25) climbed 78 percent and hit a record 1,341.89 in April 2011, outperforming U.S. and European benchmarks.

Israel's local bonds have rallied 96 percent in dollar terms since May 1, 2005, compared with a 42 percent increase for a global index of government debt, data compiled by Bank of America Merrill Lynch show.

Fischer told Netanyahu yesterday of his plan to leave on June 30, the bank said in a statement. No reason was given for the early departure and the governor scheduled a press conference for today to discuss his plans.

In addition to Bernanke, Fischer taught European Central Bank President Mario Draghi at MIT in Cambridge, Massachusetts. Bank of England Governor Mervyn King said in a statement he has the "highest admiration" for Fischer and called his resignation "a loss to the central banking community."

Successor Search

Among possible successors are Avi Ben-Bassat, head of the Bank of Israel's research department and former director general of the Finance Ministry, as well as the central bank's former deputy governor, Zvi Eckstein, said Jonathan Katz, a Jerusalem- based economist for HSBC Holdings Plc. Another mentioned is Galia Maor, the woman who stepped down last year as chief executive of Bank Leumi Le-Israel (LUMI) Ltd., the country's biggest lender, and a former senior director of the central bank.

"When push comes to shove, when Netanyahu appoints the next governor, he is well aware that Israel needs a well-known and credible figure, independent, with central banking experience," Katz said.

Fischer's dual focus on employment and growth alongside price stability has marked a shift at the Bank of Israel, where previous governors placed an emphasis on inflation. It's among a raft of changes that the Zambian-born economist introduced during almost eight years in charge. Among them: shifting responsibility for the monthly interest-rate decision from the governor alone to a seven-member Monetary Committee, including three outside academics. He helped lobby a new law through the Knesset to get the group created.

Harder Without

"We faced a lot of unexpected circumstances, obviously, since I joined the bank in 2005, and sitting down with colleagues you trust, and thinking your way through, should we do this, should we do that, there is nothing quite like it," Fischer said in a Jan. 25 interview at the World Economic Forum in Davos, Switzerland, on Bloomberg Radio's "Surveillance" with Tom Keene.

"If they weren't there, it would be a heck of a lot harder to figure out what to do," he said.

Fischer was approached in early 2005 by then-prime minister Ariel Sharon and Netanyahu, serving as finance minister, to succeed David Klein as central bank governor -- even though he wasn't an Israeli citizen or resident.

Kibbutz Resident

Fischer's connection with Israel dates back decades. In Zambia, he was a member of Habonim, a Zionist youth group, along with Rhoda Keet, his future wife, with whom he has three sons. In the early 1960s, he spent six months on a kibbutz on Israel's Mediterranean coastal plain, where he combined learning Hebrew with manual labor. He conducts his official business in Hebrew with an accent that indicates his upbringing in southern Africa.

Fischer has previously toyed with leaving before the end of his term in 2015. In 2011 he put himself forward as a candidate for the leadership of the IMF. He was disqualified for the post as he was over the organization's age limit of 65, and the position went to France's Christine Lagarde.

Fischer's "experience, his wisdom and his international connections opened a door to the economies of the world and assisted the Israeli economy in reaching many achievements, during a period of global economic crisis," Netanyahu said in an e-mailed statement.

Slowing Growth

Still, last year's economic growth rate of 3.3 percent was the slowest since 2009. Weakening growth has eased demand and helped keep inflation within the government target of 1 percent to 3 percent since September 2011, the longest such period since 2007, leaving room for Fischer and the monetary policy panel to lower rates.

Some of Fischer's innovations have been aimed at making the bank more transparent, such as publishing minutes of rate meetings and holding quarterly sessions with economic forecasters.

He leaves for his successor the issue of home prices, which increased 5.7 percent in the 12 months through November, according to the Bank of Israel. Housing debt rose 7.5 percent to 275 billion shekels ($73.5 billion) at the end of October. The Bank of Israel capped the loan-to-value ratio in new housing credits in an effort to keep mortgages in check.

No comments: