Arnon Ikan, senior director for foreign currency transactions, accountant general's office, ministry of finance
What was your deficit target for 2001?
Israel's deficit target for 2001 was 1.75% of GDP, but the actual deficit will account for 2.5%-2.75% of GDP.
Why did Israel overshoot its budget deficit target of 1.75%?
There are three main reasons why the percentage has overstepped expectations. One is the global and, specifically, US slowdown. Israeli exports are largely oriented to the US and if the US has less buying power, Israel is directly affected.
The second is the link between Israel and the Nasdaq. Many companies listed on Nasdaq are part Israeli and part US owned. The sharp decline has affected the Israeli owned, or part owned, high tech companies. The US and global slowdown and the sliding Nasdaq together account for a drop of around 2% of GDP from the potential growth rate of the Israeli economy, which is between 4% and 5%.
The third is the intifada. This has severely affected tourism, which has hit rock bottom. The drop in tourism is around 45%, which accounts for around 1% of Israel's GDP.
We hope to see GDP rebound next year. The government expects GDP growth to increase to 4% in 2002.
How are you financing the deficit?
Israel has three avenues of raising funds. One is the proceeds from privatisation, the second is domestic borrowing and the third is external borrowing. External borrowing comprises bonds and loans issued in the international capital markets, and Development Corporation of Israel borrowing. These both account for our annual foreign currency needs.
We have selected three institutions to be privatised. One is Bank Leumi, another is telecoms company Bezeq and the third is Zim Shipping. These three may not be privatised this year, but the process has started.
We hope to target both domestic and international investors and raise anything between Ish3bn and Ish10bn. With an inflow from this privatisation, we should not need to borrow too much either domestically or internationally over 2002-2003.
Israel made up the bulk of its deficit this year from domestic borrowing. The market is deep and local institutional investors have large appetites for state debt. The rest was made up of external borrowing.
What percentage of the external borrowing do the new $500m bond and $225m loan for Israel make up ?
The recently mandated bond and syndicated loan are being used to refinance external liabilities.
The syndicated loan was launched at $150m and increased to $225m, and the previous syndicated loan for the State of Israel, signed in 1996, was also closed oversubscribed and increased. There seems to be appetite for this kind of debt, so why do you not visit the international loan market more often?
The visit to the loan market was very successful and we might look at exploring that avenue more often.
We left the loan market alone when it faded out. The Japanese banking sector had less appetite, big bank mergers meant less liquidity, jumbo $10bn-$15bn Eurobonds and Yankee bonds became more popular, and banks generally became more sensitive about returns.
The loan market has come back into fashion somewhat and this year we decided to test Israel's relationship with the commercial banking sector. The deal was very successful. Banks from the US, Europe and Asia Pacific showed strong support and the loan was oversubscribed by 50%.
There is obviously bank appetite for sovereign debt and the pricing was attractive for us. We were happy with the conclusion and will most likely come to the loan market in the future.
How do you choose the arranging banks of these deals? Are they relationship driven?
We use a very thorough and comprehensive selection process, whereby we try to be as transparent as possible. We receive written proposals, analyse them, invite a shortlist of banks for oral presentations, a beauty parade is held, and then we choose.
Analysts say that the new $500m bond mandated to Lehman Brothers and Salomon Smith Barney will be used to establish Israel's name in the markets and to set a benchmark. Do you agree?
Yes, the new bond is aimed at maintaining the brand name of Israel in the global capital markets and will be used to set a good benchmark for the government and for Israeli entities that would like to borrow in the international markets.
One of our major strategic goals as mentioned above is to "open the doors" to the international capital markets for private Israeli issuers and to enable them to fund at the most attractive levels possible.
Some of the larger Israeli companies have a single borrower's limit in the domestic banking system. Because of this, they need to seek funding sources in the international capital markets, and our benchmarks in these markets assist them in accessing the markets at attractive levels of funding.
Will the pricing of the new bond be affected by the tricky political situation in Israel?
We have recently received indicative pricing from various investment banks and these indications prove that the current geopolitical situation has a minimal effect on our pricing.
Traditionally, Israel has relied heavily on the retail investor base in the US. Will you focus more on the Euromarket in the future?
Israel aims at institutional investors around the globe. Today, our paper trades in the major capital markets - the US, Europe and Japan - and therefore our issues going forward will be targeted at the global investor base, and not specifically one market.
Fitch has set Israel's sovereign rating at A- with a negative watch. Do you expect this to drop, and if it does, how will this affect borrowing?
Fitch representatives have just finished visiting Israel as part of their annual process of rating the sovereign. We have provided them with updated data regarding the performance of the Israeli economy and they also met the policymakers of the economic frontier in Israel.
It will most likely take a few weeks before Fitch publishes its ratings for Israel. We cannot foresee a reason to change our ratings downwards, as our economy has proved to be solid and has performed well over the years.
Is it still true to say that between 50% and 60% of external debt is made up of a programme of bilateral loans started in 1992 and guaranteed by the US Treasury?
The $10bn US loan guarantee programme that started in 1992 ended in 1998. But of the $10bn given, Israel has only used $7bn, and there is still a fair amount left over, which is kept in a surplus fund in the Bank of Israel. Our annual financing needs are around $2bn-$2.5bn, so despite the problems we are experiencing - the slowdown, etc - we are pretty relaxed. The surplus of the US loan programme is a safety net for us, a cushion that we do not really use but like to know is there.
We have the ability to approach the domestic market instead of borrowing in the international markets, or to utilise the surplus fund if needed.
Does "State of Israel" borrowing by the Development Corporation of Israel still account for some 33% of external debt? Is it true to say that this debt is bought at preferential rates by foreign investors with strong relationships with Israel?
Yes, the bonds issued for 'State of Israel" do account for one-third of our debt. A unique organisation, the Development Corporation of Israel appeals to Jewish communities around the world. This is a retail oriented organization that has proven to be very reliable, especially under adverse circumstances and currently provides $1bn per year.
It is a unique investor base and there are around a million names holding paper that is non-tradable and non-transferable.
Are you planning to step up annual foreign currency borrowing?
No, the upcoming privatisation process means that we should have a fair amount of liquidity at our disposal.
Do you think foreign investors' opinion of Israel has changed because of continuous political problems? Or are you confident that you will receive the support you need?
What has affected the economy is the global, and especially US slowdown, because of relationships between us. The political problems? It is not a global war, just domestic instability. We are still confident we have the support of the international capital markets. We believe that over the past few years we have managed to reach investors from all around the globe and present strong credentials and credit-worthiness and we are confident that we will receive the support of the international capital markets.
The terrorist attacks in the US could affect economies worldwide - what has been the effect on Israel? Will this influence your borrowing plans for the rest of the year?
It is too early to tell at this stage what the direct effect of the incidents will be. Obviously, Israel will be affected to some extent, but at this early stage I do not think anyone has a clear understanding of what that might be. The stock exchange was relatively stable and only fell by 2% on the day of the attacks. With regard to borrowing plans, we will keep a keen eye on the markets, and if market conditions remain calm we will continue as planned. *