Milken Institute: Israel’s Offshore Gas Bonanza Both An Opportunity And A Risk

ancient shekelIsrael’s natural gas wells could lead to an unsustainable shekel.

Although the revolution in Egypt this past spring threatened Israel’s gas supply from the south, Israel took relief in its newly discovered Tamar and Leviathan gas fields deep beneath the Mediterranean Sea, estimated to produce tens of billions of cubic feet of natural gas.

But even though the discovery will likely increase Israel’s GDP by more than 2 percent, and help it produce energy domestically, a recent report by the Milken Institute says there may be some serious negative consequences as well. Presented at the Globes Israel Business Conference, which took place on December 11 to 12 in Tel Aviv, the report recommends that Israel create a “sovereign investment fund,” a government-owned gas company stock portfolio that could be invested in international markets.

The government-managed fund, which would include $70 billion the government already owns in foreign exchange, would help mitigate many of the financial disasters that will come from unbridled growth of the gas sector, the report argues. It looks at a similar situation in the Netherlands in 1959, when a surge in national wealth–from oil and gas discoveries–led to a quick and sharp increase in Dutch revenue. The result: exchange rate appreciated in value, exports were less competitive, the domestic currency inflated in value and thousands of manufacturing jobs were lost.

If Israel goes the same route and allows for its gas to be exported, the country’s trade surplus will increase by $2 billion within the next ten years, the report says. In fact, Israel is in the midst of planning a gas pipeline that would connect the supply from Israel to Cyprus. The dramatic increase in exports could cause similar currency appreciation within Israel and a subsequent financial crisis.

“Capital flows from gas royalties could double trade and foreign-exchange surpluses and strengthen the shekel to the point of endangering Israel’s high-tech exports. Balancing the competing needs of investing in the future, managing the exchange-rate risk, and insuring against catastrophic risks creates challenges for policymakers concerned about the intergenerational transfer of this important new source of sovereign wealth,” the Milken Institute said in presenting the report.

Prime Minister Netanyahu already called for such a fund in January, but the report uses data gathered from the group’s Financial Innovation Lab to back the request. Participants in the lab included various finance and business leaders including Deputy Governor of the Bank of Israel, Karnit Flug, head of the Israel National Economic Council, Eugene Kandel, Director General of Israel’s Ministry of Finance, Haim Shani, and Senior Deputy Accountant General of the Ministry of Finance, Eran Heimer.

The report notes that approximately 50 countries already manage similar funds, in countries such as Norway, Chile and Kuwait to manage currency flows and mitigate specific financial problems.

Download the full report, “Structuring Israel’s Sovereign Investment Fund: Financing the Nation’s Future,”  here.

Shifra is currently working on building an Israel clean tech finance insider’s report. Email [email protected] to be notified when it goes online.

Image of ancient shekel via antiquitiesproject

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