Israel's Rookie Finance Minister Starts Under Fire

Benjamin Netanyahu hoped to be the first Israeli leader to serve as both Prime Minister and Finance Minister in his own government. But political constraints and the need to hand out ministerial posts to members of his Likud party forced him to do the next best thing by appointing himself to the newly formed position of Economic Strategy Minister and making his close ally Yuval Steinitz Finance Minister in the new Israeli government sworn in on Mar. 31.

Steinitz, a 51-year-old former philosophy professor, has made a name for himself as an expert in security and defense issues since entering the political arena a decade ago. But he lacks deep experience in economics and business at a time when Israel is facing the worst economic downturn in its history.

"One of the greatest challenges facing us is dealing with the economic crisis, and we will do so with intelligence and perseverance," Steinitz said after his appointment was officially announced early on Mar. 31. The new Finance Minister stressed that he would be working very closely with Netanyahu.

Steinitz Already Under Fire

Few doubt, though, that the Prime Minister will be calling the shots when it comes to the economy. "Netanyahu will be running the show, at least at the outset, as it will take Steinitz time to grow into the job," says a businessman and close adviser to the new Prime Minister who spoke on condition of anonymity. The adviser notes that some of the country's most successful previous Finance Ministers also have had little experience in economics, citing the likes of President Shimon Peres and former Finance Minister Moshe Nissim.

But the severity of the global financial crisis and its devastating impact on the local economy have led to sharp criticism of the appointment. "Is this the kind of person we need as our Finance Minister at a time of such an unprecedented economic crisis?" asked former Finance Minister Avraham Shohat, who served under former Prime Ministers Yitzhak Rabin and Peres.

Pundits also questioned Netanyahu's judgment—even if he ends up pulling the strings. The dean of the country's economic correspondents, Sever Plotzker, summarized his view in a column in Yediot Ahronot, Israel's largest newspaper. He noted that while in Western countries leading economists and financial experts are being appointed to serve as Finance Ministers in these trying times, Israel is handing over the post to a Knesset member who has never served as a Minister and lacks basic qualifications for such a hugely responsible position.

Backing Government Loan Guarantees

Steinitz actually started his on-the-job training in recent weeks as the member of Netanyahu's transition team charged with tackling the economic crisis. The "100-day team," as it was dubbed, made its recommendations to Netanyahu on Mar. 26. They included a plan for rescuing billions of dollars in corporate debt amassed by Israeli tycoons who have seen many deals sour in the past year. The bonds issued by companies such as Africa-Israel Investments (AFIL01.TA) and Delek Group (DELKG.TA) were used in many cases to finance real estate projects in former hot spots like New York, Las Vegas, Miami, Moscow, and London.

The proposal by the Steinitz-led team calls for a government guarantee to cover 75% to 80% of new bonds that would be issued. Criteria would be set for distinguishing between investments in Israel and abroad, with credit granted more readily to companies with core businesses in Israel. In addition, the team called for state guarantees of loans to small and midsize businesses in order to solve the credit crunch and prevent a further economic deterioration.

Earlier this month the Bank of Israel predicted the economy would contract by 1.5% this year, its worst performance since the nation's founding. The decline follows five years of unprecedented growth, which came to an abrupt end in the final quarter of 2008.

Leading Bank Profits Down 98%

Unemployment has been rising rapidly. In January the jobless rate rose to 6.8% and predictions are that it could top 8% by the middle of the year. The country's export sector, which has been the major locomotive for economic growth in recent years, also has seen a sharp decline. Israel's Manufacturers Assn. estimates that the country has lost $4 billion in exports from October to February because of a drop in orders. "Each $1 billion loss in exports costs us 10,000 jobs," said Ruby Ginel, director of the Manufacturers Assn.'s Economics Div.

The changing business climate already has had a marked impact on the country's banking sector, which has traditionally served as a mirror of the economy. Profits at Israel's five leading banks fell by 98% in 2008, to a mere $50 million. Four of the five banks reported losses in the final quarter of the year.

The Bank of Israel has stepped up its efforts to help the economy. On Mar. 23 the central bank cut its base rate by 25 basis points, to a new low of 0.5%. It is also using other monetary tools such as buying government bonds to lower long-term interest rates and continuing to purchase 100 million U.S. dollars per day to make Israeli exports more competitive on world markets by weakening the shekel.

Netanyahu's Costly Promises

Netanyahu and his rookie Finance Minister will have to focus their efforts on fiscal policy to deal with the economic crisis. The consensus is that the budget deficit will rise sharply to cover the cost of increased government spending on infrastructure investments and ballooning unemployment benefits. Economists are predicting that the deficit could go as high as 7.5% of GDP, compared with 1.7% last year.

"The real question is how long Israel will have to live with such a high level of deficit spending and how quickly it can return to fiscal discipline," said Leo Leiderman, chief economist at Bank Hapoalim (POLI.TA). That task is further complicated by the sheer size of the new coalition government and by the costly promises Netanyahu made to entice his governing partners.

In his previous tenure as Finance Minister under Ariel Sharon, and earlier as Prime Minister, Netanyahu made a name for himself by taking tough measures to reform the Israeli economy. This time around the conditions are far more complex. His appointment of Steinitz as Finance Minister has many observers wondering whether Netanyahu has compromised too much—and by doing so, potentially tarnished his reputation as an economic wunderkind.

Sandler is a correspondent for BusinessWeek in Jerusalem .

Sandler is a correspondent for BusinessWeek in Jerusalem.

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