Israel's economy is strong enough to weather current market turmoil stemming from mass anti-government protests in Egypt despite a higher risk profile, Bank of Israel Governor Stanley Fischer said on Monday.
Fischer pointed to credible budget and interest rate policies and a high level of foreign currency reserves of some $71 billion as helping Israel deal with increased risk. The country's credit default swaps, which insure against a debt default, rose 30 basis points in the last week.
"We will have to confront what has happened in the past week," Fischer told a conference on Israel's security challenges. "In my opinion, we have the economy and the policies that will permit us to deal with the future challenges. It is important to note that we have a strong and stable economy."
Protesters have demanded Egyptian President Hosni Mubarak step down after 30 years in power. Israel, which has a three-decades-old peace treaty with Egypt, fears that Egypt could end up with a radical Islamic regime similar to Iran's.
Fischer said that in the past five years, Israel's economy and markets have been resilient in the face of the illness of former Prime Minister Ariel Sharon, the second Lebanon war, internal political instability, and the global financial crisis.
"We have a responsible fiscal policy, monetary policy is credible and we have reserves should we need to use them," Fischer said, defending the big rise in foreign currency reserves to meet future geopolitical problems. "And we have very flexible private sector."
Israel's economy grew an estimated 4.5% in 2010, outpacing expectations for growth of 4%. Fischer said he expected the figure to change but did not elaborate.
He also said the central bank's 2011 growth forecast of $3.8 is set to rise in the coming weeks.
"There is no doubt that when we update it ... this number will go up," Fischer said.
He added that inflation was largely under control at a 2.7% rate in 2010, within an official target of 1-3%. But Fischer, who has raised interest rates seven times since August 2009 – most recently with a quarter-point move last week – said the central bank was determined to avoid higher inflation caused by housing prices that have jumped 40% the past two years.
The central bank, he said, will continue to take steps – including using monetary policy – to deal with the housing market.
Fischer said Israel's strong economy and a current account surplus had helped to lead to an appreciation of the shekel the past decade – something that has led to complaints from exporters.
A robust economy and strong currency are still preferable to a weak economy and shekel, he said.
Fischer praised the government's tight spending policies and noted that although the budget deficit was 3.7% of gross domestic product in 2010 – below a target of 5.5% - it would have been far lower if not for a huge spending binge in December.
He estimated a budget deficit of below 3% of GDP in 2011.
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