AI riches, deficit headaches
A flood of earnings from foreign-owned tech companies is rewriting the rules of Israel’s balance of payments.
For the first time since 2012, the Israeli economy has recorded a current account deficit in its balance of payments. But unlike the previous episode, the source is not economic weakness, it is economic success. In the first quarter of 2026, the current account slipped into a deficit of $0.1 billion, while foreign direct investment (FDI) in Israel surged to $14.1 billion, an all-time quarterly record. Both developments stem from the same source: record profits generated by high-tech and AI companies, which inflated the primary income account deficit (reaching $6.7 billion) while simultaneously being recorded as inward direct investment. The result is a paradox: despite the deficit, the shekel has not weakened. In fact, it is the extraordinary success of Israel’s technology sector that is helping produce the deficit.
According to data from the Central Bureau of Statistics, the current account, the broad measure of transactions in goods, services, income, and transfers between Israel and the rest of the world, moved to a deficit of $0.1 billion in the first quarter of 2026, compared with a surplus of $3.8 billion in the previous quarter. The $3.9 billion deterioration in a single quarter stemmed almost entirely from one component: the primary income account, which posted a record deficit of $6.7 billion, among the largest ever recorded.
It is important to clarify that the trade balance itself remained strong. The goods and services account posted a surplus of $5.4 billion, one of the highest on record, supported by record services exports that again approached $10 billion for the quarter. The deficit, therefore, is not a trade story, it is a capital income story.
This is where the paradox begins. A current account deficit is usually viewed as a sign of weakness, capital outflows, pressure on the currency, or imports exceeding exports. The last time Israel recorded a deficit, in the first quarter of 2012, it fit that pattern: a $2.3 billion deficit amid slower growth and high energy-import costs.
In 2026, however, the opposite is happening. The deficit is tiny by comparison, just $0.1 billion, and comes at a time when foreign direct investment has soared to a record $14.1 billion in a single quarter, surpassing the previous high of $11.4 billion recorded in the fourth quarter of 2018.
The primary income account measures flows of interest, dividends, and investment profits between Israel and the rest of the world. Income earned by Israelis from their investments abroad remained relatively stable at approximately $6.6 billion. However, income earned by foreign investors from their investments in Israel jumped to $13.1 billion.
The source of this increase is not interest payments on government debt, but corporate profits. As foreign-owned companies operating in Israel, particularly in AI, high-tech, finance, and energy, generate larger profits, the returns attributable to foreign shareholders increase and are recorded as outflows in the primary income account.
Why the Shekel Hasn't Weakened
If those profits were actually flowing out of the country, the shekel would be expected to weaken. Yet no such depreciation has occurred.
The explanation connects both sides of the equation. Most of these profits are not distributed to shareholders but are instead reinvested in the Israeli companies that generated them. In balance-of-payments accounting, these retained earnings appear as outflows in the current account while simultaneously reappearing as direct investment inflows in the financial account.
This accounting mechanism helps explain the surge in FDI to a record $14.1 billion.
At the same time, Israelis’ direct investment abroad recorded a negative flow of $11.7 billion, while the Bank of Israel’s foreign exchange reserves increased by $4.5 billion. The capital effectively remains in Israel, preventing downward pressure on the currency.
Market participants estimate that much of this activity is concentrated among a relatively small number of highly profitable companies, particularly large AI and technology firms. This is not a broad-based transformation across the economy, but rather an increasing concentration of profitability within a narrow group of companies whose decisions on profit retention and distribution can significantly affect the national accounts.
It is also important to note that the deterioration is occurring in flows rather than in Israel’s underlying financial position.
Israel’s net international investment position actually improved to $250.4 billion at the end of March, compared with $237 billion a year earlier. Net external debt remained deeply negative, meaning the country’s overseas assets exceed its liabilities by more than $325 billion.
In other words, Israel has not become less solvent. What has changed is the composition of the current account.
Still, the development should not be dismissed. Even if the profits are ultimately reinvested and do not create actual capital outflows, they reduce the headline current account surplus and alter its structure. The services sector remains exceptionally strong, generating a quarterly surplus of roughly $10 billion, including $17.1 billion in high-tech services exports. Yet the economy is becoming increasingly dependent on profits generated by foreign-owned capital.
Credit rating agencies assign significant weight to the strength of a country’s external sector, an area in which Israel currently enjoys top-tier rankings. The question facing policymakers in Jerusalem is therefore not whether this deficit is dangerous, but whether this unusual paradox is a temporary statistical phenomenon, or the beginning of a new structural reality for the Israeli economy.
