Transcript of a Conference Call on Israel

February 14, 2014

Washington, D.C.
Wednesday, February 12, 2014

MR. SILVESTRE: I'd like to welcome you to this conference on Israel 2013 Article IV Consultation. Since we seem to have only a limited amount of participants I think we're going to go straight to Q&A. But before we do that let me first introduce the participants: Krishna Srinivasan, the Mission Chief for Israel, and Kotaro Ishi, the Senior Economist at the IMF European Department.

The conference call is on the record, so whatever Krishna or Kotaro are saying can be quoted. When you ask your question I'd like you to first introduce yourself and the media you represent. So with that, let's go straight to questions.

QUESTIONER: I have two questions actually. Traditionally the IMF has been opposed to intervention in the foreign exchange market. I was wondering what is the IMF's position on the Bank of Israel's massive intervention in the forex market?

My second question is how do you think the Fed's tapering which has led to the dollar appreciation all over the world would affect the shekel?

MR. SRINIVASAN: Thanks. On intervention we recognize the report that the Bank of Israel has been undertaking program intervention to address the proceeds from gas which is something which they have done in a programmed way, and we called for more transparency there. Beyond that, we call for intervention which is limited to addressing the pressure on the shekel.

On your first question about tapering, we

think tapering will basically imply that the pressure on a shekel is likely to come down because you might see capital reversals. When you had a lot of monetary easing you saw capital coming in. With tapering you're likely to see capital coming out which should help reduce the appreciation pressure on the shekel.

I would just suggest that we have two sets of papers here. One is a staff report which is a main report which provides our view on the conjuncture and on the policy recommendations.

We also have four studies of the bank which address four sets of issues. One is on the housing, how to deal with the housing related risks. One relates to fiscal rules and how they could be modified initial context. There's one paper on the rule of a potential fiscal council for Israel. The last is a paper on financial architecture burdening the financial stability community. I would urge you to look at those also when you read our staff report.

We also have a section which looks at the external sector which we do before all country reports, but here we have one which looks at various dimensions of external sector in the case of Israel. So I would urge you to look at that too.

QUESTIONER: So if I may, a couple of questions about the section dealing with the real-estate situation in Israel. First of all, if I understand you correctly, the IMF thinks there's a 20 percent chance for a major fall in real estate prices in Israel over the next five years. I just wanted to make sure that is correct, and to have some assessment of how dangerous is this? How does the IMF come up with this number: 20 percent?

MR. ISHI: Basically those results come from our economic analysis and our modeling work. We have a full presentation in the back of the report in the first economics issues paper. What I would like to underscore is that we see price increases being widespread across Israel, ranging from about 60 percent in some parts to 95 percent increase since 2007. So the house price increases are quite widespread.

The point we are trying to make is that policy measures have been put in place to address the housing related risks including both direct and indirect macro prudential measures. If house prices continue to rise and pose risks to financial stability, there could be some risks to the financial sector and to the fiscal more generally. In that case, to address those kind of risks, the Bank of Israel could pursue more direct macro prudential measures including tightening of loan to value, and tightening limits on debt service, income, and so on.

I would also note that we have been following this issue for some time and we do see house prices continuing to increase. So the advice centered around how to deal with it if there is a sudden decline in prices, and how to prevent further increases. So that's the objective of the paper there.

QUESTIONER: Hello. I just wanted to ask a follow-up question on that. At one point in your report you say that the Bank of Israel shouldn’t take more macro prudential steps. Then in another place you say, well, if housing prices continue to increase then it should. I wasn't sure if you were thinking they should do it already now or if there's room to wait and see if housing prices increase more. If so how long would you wait and how much would prices have to go up in order for them to have to take more steps?

MR. ISHI: The point we make here is the Bank of Israel has already put in place many macro prudential measures. They have adopted indirect measures such as capital surcharges and supplemental provisioning. They've also put in place direct measures like LTVs and DTIs and so on.

Now our evidence and the analysis find that these direct measures like limits on LTVs and DTIs appears to have an effect on the volume of transactions, and also limit predictive behavior. But we need to give them more time to see how effective they are.

So these have been put in place more recently to give them more time, but in the meantime, if prices continue to increase you would think in terms of tightening these limits because these appear to have more effect on limiting the risks. So that's what we mean.

So they already have in place many measures, but if house prices continue to increase they can contemplate tightening these direct measures like LTVs and DTIs. Does that answer your question?

QUESTIONER: It's more if they continue to increase --

MR. ISHI: Right. I mean --

QUESTIONER: -- not so much to do it right now?

MR. ISHI: They already put in place a bunch of measures and some of these need to be given some time to sense their effectiveness like the one on LTVs and DTIs. But if they see continued price pressure then they could tighten these limits which I think will have an effect.

MR. SILVESTRE: This concludes our Conference Call on Israel. I want to thank the participants who've been here. If you have further questions, you can always direct them to me, Bruno Silvestre, and I'll make sure you get the proper response.


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