Global Slump Takes Heavier Toll On Exports Than Hamas Rockets

by David Rosenberg
Business Report (South Africa)
January 25, 2009

http://www.jewishpolicycenter.org/707/global-slump-takes-heavier-toll-on-exports-than

At Orbotech's headquarters, 40km north of the Gaza Strip, photocopied signs pointing to the nearest bomb shelter were pasted on the walls three weeks ago as Israel launched its offensive against Hamas.

Orbotech, which makes equipment for inspecting flat-panel displays and printed circuit boards (PCBs), was within range of Palestinian rockets that killed four Israelis. Even before a cease-fire took effect this week, chief executive Rani Cohen was focused on another threat: the slumping consumer electronics market.

"The bare-board PCB market has been hit very, very hard," Cohen said at the company's offices in Yavneh.

"If customers in the past would say, 'I'll order and see what's going to happen,' today they only order when they have to."

Israel's economy might stagnate this year after expanding more than 4 percent in each of the past five years, US investment bank Morgan Stanley said this week.

Growth is slowing as demand for computers and communications equipment declines, reducing sales for technology companies that account for about half of Israel's exports, and as a plunging stock market wipes out personal wealth.

The Tel Aviv Stock Exchange's benchmark index fell 34 percent in the past six months as companies such as Intel, a bellwether for the global computer industry, began cutting sales forecasts.

Israeli investors have pulled about 20 billion shekels (R52 billion) out of pension funds and other savings, causing bond prices to sink and choking off finance for local firms.

"We've suffered a kind of second-order effect from the credit crunch," said Manuel Trajtenberg, the chairman of Israel's National Economic Council and Prime Minister Ehud Olmert's economic adviser. "Our financial institutions are sound, but they reacted to the uncertainty."

Israel initially delayed the effects of the global slowdown with "market-oriented" government policies, said Miroslav Plojhar, a London-based economist at JPMorgan Chase. In 2003, as Israel's economy emerged from its deepest recession, then-finance minister Benjamin Netanyahu deregulated industries such as telecoms and financial markets, sold state-owned firms and cut taxes, Plojhar said.

Technology companies such as Orbotech, whose customers include Nokia, Siemens and Sony, helped boost Israeli exports by 83 percent in the past five years. Orbotech's sales rose 18 percent in the first half of last year as net income grew fourfold to $9 million (R90 million).

By the third quarter, things had changed. Orbotech cut pay and jobs to reduce annual costs by as much as $60 million. In the past six months, the shares have fallen 64 percent on the Nasdaq Stock Market.

Nokia, the largest maker of cellphones, said the handset market would fall 5 percent or more this year, the first contraction since 2001.

Cohen said the fighting in Gaza did not interrupt manufacturing or research at Orbotech.

"I think the closest rocket that landed was 10km away," he said. While some staff were called up for reserve duty, that was normal in a country where most men do annual army service until they are 40.

Israeli companies had learned to live with war, said Jonathan Medved, the chief executive of Vringo, a start-up that makes video ring tones for cellphones.

"People here live with risk," Medved said from his offices in the Jerusalem suburb of Beit Shemesh. "We send our kids to school and go out to cafes when there are bombs blowing up in the streets. That allows Israel to be more resilient in this negative environment."

In 2006 Israel's month-long conflict with Lebanon's Hezbollah movement caused gross domestic product (GDP) to contract for a quarter as the north was hit by 4 000 rockets. The economy quickly rebounded, with growth reaching 5 percent for the year.

Hamas launched about 850 rockets before the truce took effect last Sunday, and their range was limited to a less densely populated part of Israel. The Israeli Manufacturers Association estimated direct damage to industry totalled $23 million. About 1 700 factories employing 39 500 people were in rocket range.

After the government's early success in bolstering the economy, it had been slow to enact policies to counter the effects of the global slowdown, Trajtenberg said, citing a political stalemate before general elections due on February 10.

Parliament recessed before approving the 2009 budget, leaving the treasury to operate with last year's spending plan.

Last month finance minister Ronnie Bar-On said the delays were caused by candidates seeking headlines.

The government has since approved a plan to insure some pension savings and a programme to guarantee as much as 6 billion shekels of borrowing by commercial banks.

The Bank of Israel raised the base lending rate to 4.25 percent last September, but reversed course in October, lowering the rate five times in four months to 1.75 percent.

Central bank governor Stanley Fischer has expressed concern that lower rates were not being passed on to borrowers, and that too much of the burden of buttressing the economy was falling on the bank.

GDP will probably grow 0.9 percent this year, according to the average forecast of 13 economists.

That is down from 1.7 percent in a similar poll taken five weeks earlier and the slowest pace since 2002.

While Trajtenberg expects technology companies to lead Israel out of its slump, he said that hinged on their ability to shift sales to China and India, whose economies would probably perform better than traditional markets in the US and Europe.

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