Bloomberg News

Fischer Growth Focus Helped Israel Beat World on Returns

January 30, 2013

Bank of Israel Governor Stanley Fischer

Bank of Israel Governor Stanley Fischer. Photographer: Nelson Ching/Bloomberg

Bank of Israel Governor Stanley Fischer celebrated the reconstruction of a South American synagogue transported to Jerusalem, giving tours in December to admiring donors. Yesterday it was Fischer who received plaudits for rebuilding, in this case the central bank and the economy it oversees.

“He’s done marvels in Israel,” Nobel laureate Robert Solow, who taught Fischer and then worked alongside him 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.

Fischer said today he decided to step down for personal reasons, mostly because his family is in the U.S. and he has achieved most of the goals he set to accomplish.

“I have no new job, but I intend to be involved in public life in the country and hope that my voice will continue to be heard in public debate,” Fischer said at a press conference in Jerusalem. “Israel is my second home and I don’t know if that’s any less than my first home.”

‘Responsible Adult’

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. Among the first items on the agenda may 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.

Israeli stocks traded in New York fell to a one-month low and the cost of protecting Israeli bonds against default surged to 126 basis points, the highest in three weeks. Yields on the benchmark 10-year bond due 2023 rose 3 basis points to 4.12 percent at 1:13 p.m. in Tel Aviv. The shekel strengthened 0.2 percent and was trading 3.7221 a dollar.

“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.”

Rising Shekel

Israel 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 month-long battle against Hezbollah in 2006, was involved in a similar conflict with Hamas two years later, and now cites a threat from Iran’s nuclear program. 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.

Successor Search

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 declined to propose a successor, though he said there are many good candidates in Israel. While saying he appreciated that Israel’s leaders “went outside” to appoint him governor in 2005, “I don’t think it’s something that they should do every time.”

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.”

Harder Without

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.

“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.

Kibbutz Resident

“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 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.

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.

Slowing Growth

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 yesterday.

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 sessions with economic forecasters.

House Prices

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.

At the white 18th-century synagogue that was taken from Suriname and reconstructed at the Israel Museum, not far from his office, Fischer reflected on his own path from Africa to Israel and the Jewish people’s yearning for a home.

“Every time I see a synagogue, I begin to think about this nation, wherever they go, the first thing they do is build themselves a community center, no matter where,” he said.

To contact the reporters on this story: Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net; Gwen Ackerman in Jerusalem at gackerman@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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