Israel’s tech exports hit a record but foreign owners are claiming more of the gains
The primary income deficit reached $15.6 billion in the first half of 2026, nearly twice the figure for all of 2025.
Israel’s current account recorded a deficit of $500 million, seasonally adjusted, in the second quarter of 2026, according to balance-of-payments data released Wednesday by the Central Bureau of Statistics. It was the second consecutive quarter in which the current account was in deficit, following a $800 million deficit in the first quarter.
The development is highly unusual for Israel, which has recorded a current-account surplus for nearly two decades, with only a few exceptions.
The shift is not being driven by foreign trade. Israel’s goods and services account, which measures exports minus imports, recorded a massive $7 billion surplus in the second quarter, one of the highest on record. The problem is what happens to the income generated by that activity.
The primary income account, which captures income flows between Israeli residents and foreign residents, recorded a deficit of $7.8 billion. The deficit was large enough to offset most of the surplus generated by Israel’s trade in goods and services.
The contrast is particularly striking in services, where Israel continues to post record numbers. The services account recorded a $10.2 billion surplus in the second quarter, the highest figure in the Central Bureau of Statistics’ series since 2022 and a record since the series began.
Service exports reached nearly $27 billion in a single quarter. High-tech services accounted for $17.7 billion of that total, representing approximately 73% of business service exports.
But the primary income deficit absorbed about 77% of the services surplus. That was nevertheless an improvement from the first quarter, when the primary income deficit absorbed 91% of the services surplus.
The secondary income account, which includes current transfers into and out of Israel, also weakened. Its surplus fell to just $300 million from $1.1 billion in the previous quarter.
The deterioration in primary income does not appear to be a one-quarter anomaly. The deficit stood at $7.8 billion in the second quarter, almost exactly matching the first-quarter figure.
The previous peak in the updated series was $2.9 billion, recorded in the third quarter of 2025.
The numbers become even more striking when viewed cumulatively. During the first half of 2026, the primary income deficit reached approximately $15.6 billion. That is nearly twice the $8 billion deficit recorded for all of 2025 and 7.5 times the $2.1 billion recorded in 2024, before the latest surge in AI-related profitability.
The source of the deterioration is also relatively clear. Compared with the second quarter of 2025, the primary income deficit widened by $5.5 billion. Some 97% of that deterioration came from higher payments to non-residents.
Income earned by foreign investors from investments in Israel reached $13.7 billion in the second quarter, up from $8.5 billion a year earlier. About 85% of that income came from direct investments, meaning ownership stakes in companies.
By contrast, income earned by Israelis from investments abroad totaled $6.2 billion and remained virtually unchanged.
The mechanism behind the change began to emerge in 2025, as the profitability of foreign-owned companies operating in Israel surged, particularly in the artificial intelligence sector.
Much of those profits were not distributed to shareholders but instead reinvested in the companies. This helps explain why the sharp increase in the primary income deficit did not necessarily translate into corresponding pressure on the shekel.
Under balance-of-payments accounting, undistributed earnings are recorded as an outflow in the current account while the corresponding reinvestment is recorded as an inward direct investment in the financial account. In effect, the profits are counted as income accruing to foreign owners while being reinvested in Israeli operations rather than paid out of the country.
The financial-account data is consistent with this mechanism. Direct investment by foreign residents in Israel totaled $15.8 billion in the first quarter and $14.3 billion in the second. Together, the two quarters brought foreign direct investment to $30.1 billion in the first half of 2026, already exceeding the $25.8 billion recorded for all of 2025.
Under the Central Bureau of Statistics’ definitions, direct investment includes undistributed earnings. The quarterly data, however, does not distinguish between foreign earnings that were distributed as dividends and those that were reinvested. It is therefore impossible to determine from these figures alone how much of the profits recorded in 2026 actually flowed back into Israeli companies.
The result is an unusual feature of Israel’s economy. Its current account increasingly depends on the extraordinary strength of its high-tech services sector, but the same sector is generating growing claims on those earnings by foreign owners.
That distinction could become more important if conditions change. The decision over whether profits remain invested in Israel or are distributed to foreign owners is ultimately made by the companies and their shareholders, rather than by the Finance Ministry or the Bank of Israel.
If AI-related profitability were to moderate, or if foreign owners chose to distribute a greater share of their profits rather than reinvest them, flows that are currently reflected largely through accounting entries could translate into larger actual transfers of foreign currency abroad.
Two consecutive quarters of current-account deficits do not, by themselves, constitute a crisis. But they point to a significant change in the structure of Israel’s economy.
Israel is no longer simply exporting technology and services. An increasing share of the profits generated by that technology accrues to foreign owners, creating a growing gap between the country’s impressive export performance and the income ultimately retained by Israeli residents.
