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Analysis

Bank of Israel Governor Takes the Stage with a Clear Message and No Paper Tissues

On Tuesday, Amir Yaron and his team held a press conference to discuss the ongoing coronavirus crisis, stating that “without healthcare, there is no economy, but without the economy, there won’t be healthcare”

Omri Milman 14:4125.03.20
On Tuesday, Bank of Israel governor Amir Yaron and his team held a press conference to discuss the ongoing coronavirus (Covid-19) crisis, stating the bank’s topmost goal is “to support the economy and society, to help society reach the day after. Without healthcare, there is no economy, but without the economy, there won’t be healthcare.”

 

The bank’s press conference was so balanced and normal it seemed almost out of place. In recent weeks, Israelis have become accustomed to dramatic, not to say apocalyptic government press conferences. These (almost) nightly events frequently end with some government official demonstrating the correct way to use a paper tissue. Yaron, in comparison, used his screen time to provide a clear analysis of the country’s economic situation, offer forecasts and numbers, and even hold a Q&A session at the end. It felt like a rare moment of sanity.

 

Amir Yaron. Photo: Alex Kolomvisky Amir Yaron. Photo: Alex Kolomvisky
During times of crisis, people look to the person in charge. On Tuesday, the Israeli finance minister’s inability to function meant it was up to Yaron to step into the role of the responsible adult. With a minimum of pyrotechnics and a maximum of facts and data, he and his team outlined the complicated reality Israel will be facing in the upcoming year, went over the necessary steps taken in their area of responsibility, and lived up to their role as advisors by urging the government to implement an aggressive strategy.

 

Yaron and his team estimated that, should the restrictions be extended until the end of April, they will cost Israel’s economy around NIS 50 billion (approximately $13.75 billion), 3.5% of the country’s gross domestic product (GDP). Another month is expected to nearly double the damage to NIS 90 billion (approximately $24.76 billion), around 6.4% of GDP. At the time of the conference, the government has yet to approve the new restrictions it signed off on the night between Tuesday and Wednesday, but Yaron estimated that their implementation could increase the damage to NIS 69.2 billion (approximately $19.04 billion), 4.9% of GDP, if they last through April, and to NIS 126.8 billion (approximately $34.67 billion), 9% of GDP, if they last through May. The new restrictions are currently in place for a seven-day period.

 

The bank also recently launched an unprecedented plan to bolster the currency exchange market with NIS 15 billion (approximately $4.12 billion) and buy government bonds worth NIS 50 billion (approximately $X billion) on the secondary market—for comparison, during the 2008 crisis the bank spent NIS 18 billion (approximately $5.52 billion at the time) on bonds. The most significant step taken by Yaron, though, is that he held back and did not take all of the measures at the bank’s disposal, though he has stated he might do more as time goes by.

 

Bank of Israel officials who had been with the bank during the 2008 financial crisis told Calcalist on condition of anonymity that this was the right tactic then and will prove to be the right approach during the current crisis as well. The Bank of Israel is taking a different approach than the U.S. Federal Reserve, which has declared its willingness to buy financial assets at any sum and is using each and every tool in its arsenal.

 

The coronavirus crisis, like every big economic crisis, is rife with uncertainty. No one knows when and how it will end, and how the economy will look the day after. That is why the financial system is thirsting for a clear and calm voice. Finance ministry officials have previously accused Moshe Bar-Siman-Tov, the director-general of the health ministry, of “committing acts of terrorism” against the economy. Whether this is true or not, the finance ministry should do more to calm the public. One of Yaron’s initial weaknesses was his lack of experience in such a powerful position. Now, his inexperience is proving an advantage, as he falls back on his vast history as an economist and approaches the crisis in an analytical, calculated, and impartial way.

 

What will eventually determine the amount of damage to the domestic economy as well as how fast it will bounce back is the scope and the pace of the action taken by the government—be it via direct budgets awarded to relevant entities or via overall financial infusion. As it stands, the interim government is still struggling with making decisions that have approval across the board, which only contributes to public panic and increases public mistrust.

 

“I welcome the economic steps the finance ministry has taken so far,” Yaron said Tuesday evening. “However, to deal with the crisis we will need to allocate more resources, even at the expense of increasing the deficit. It is, therefore, appropriate to set up a substantial budgetary safety net of NIS 15 billion (approximately $4.1 billion), around 1% of the GDP, at least as a first step. This sum will go towards decisive government management of the crisis and will support the survival of small and medium businesses. As governor of the Bank of Israel, I give my full support to the government and parliament to take such steps. I call upon parliament members and decision-makers to rise above their disagreements and approve the plan presented by the prime minister, the finance minister, and his team, and to provide them with the flexibility they need as soon as possible. We need to act responsibly, quickly, and decisively while displaying leadership—the economy requires certainty.”

 

At the press conference, Yaron emphasized to the public what he has been telling the government for over a week now, that it is time to color outside the lines. After years of Prime Minister Benjamin Netanyahu neglecting the Israeli economy and after he and Finance Minister Moshe Kahlon let the budget deficit reach a very high level of 3.7%, they will now both be tested as economic leaders based on the way they handle the current crisis.