Investing in Israel?

KEY RISK FACTORS:

REGIONAL GEOPOLITICS: While Israel has shielded itself reasonably well from geopolitical tensions in the region over the last few decades, Israel’s proximity to countries that face serious internal conflicts (Syria, Iraq, Lebanon) is and will remains a risk factor.
IRAN/KSA: The fallout arising from tensions between Iran and Saudi Arabia is also another potential risk factor.
THE IRAN FACTOR: Concerns that Israel faces an existential risk because of Iran are also greatly exaggerated by the political establishment in Israel as well as the piped piper media. Should Iran ever successfully acquire nuclear capability, it will do nothing but even the playing field with Israel. Target assassinations, and the occasional bombing of Iran’s military facilities by Israel will come to an immediate end and both will learn to behave themselves within their boundaries. The only sovereign state that be afraid is the Kingdom of Saudi Arabia (KSA), an arch enemy of Iran.
OCCUPATION & BLOCKADE: The Israeli-Palestinian issue will continue to be a key challenge for as long as the matter is not amicably resolved. Meanwhile, Israel through its brutal military occupation will have to continue keeping West Bank and Jerusalem behind the Apartheid wall and Gaza under a debilitating blockade, away from plain sight of investors and tourists.
INTIFADA: The Second Intifada (“Palestinian uprising”) cost Israel billions of dollars in security costs, a huge decline in investments and tourism and sent unemployment rate in Israel to the double digits. If ever (or rather when) there is a Third Intifada, buckle your belt and ride it out or unbuckle your belt and bolt.
ROCKETS: All residential and industrial buildings in Israel are required to have bomb shelters and this serves as an extra layer of protection for those living inside Israel. During 2006-2021 across 5 attacks between Israel & Gaza, the cities that were targeted by the resistance groups in Gaza include Sderot, Ashkelon, Netivot, Ashdod, Rahat, Kiryat, Malakhi, Ofakim, Beersheba as well as Jerusalem, Dimona, Ramat Gan, Tel Aviv and Herzliya. During this period, 3165 Palestinian civilians and 31 Israeli civilians were killed, a lopsided death ratio of 1:102, in large part due to the 90% effectiveness rate of the Iron Dome, Israel’s air defence missile system.
ARAB SPRING 2.0: It is a huge understatement to say the Arab or Egyptian populace is not happy with the government. Therefore it is only a matter of time before this boils over into Arab Spring 2.0 at some point into the future. While Israel is better prepared for the next round with Tamar (9 TCF) and Leviathan (17 TCF) fields, the country did lose over US$20 billion when Egypt suspended the gas supply agreement with Israel (between 2011-2013).
THE ENABLERS: Israel has maintained full diplomatic relations with two of its Arab neighbours, Egypt and Jordan over the years. In 2020 however, Israel formally announced plans for diplomatic relations with the United Arab Emirates (U.A.E), Bahrain, Sudan and Morocco. This is widely seen worldwide as a shocking betrayal to the Palestinian cause.
CORRUPTION BUT BY A DIFFERENT NAME: In exchange for bowing to Israel, U.A.E is likely to be sold the stealthy F-35 fighter jets in coming years (although this could reduce Israel’s military advantage in the Middle East, which remains a key concern). Morocco meanwhile is eyeing for U.S. recognition of its sovereignty in Western Sahara, home to phosphate reserves and rich fishing grounds off its coast. Sudan is not only seeking billions in aid but will also be dropped from the US list of “state sponsors of terror”, raising questions as to the reliability of the list in the first place, if it can be used for such political ends. Just as notably, Israel’s defence exports in 2021 reached US$11.2 billion in sales and exports to Arab countries that joined the Abraham Accords made up 7% of all Israeli defence exports, indicating the advantages for those who abandon the Palestinian cause and join the Abraham Accords instead.
A TEST CASE: Bahrain’s recognition of Israel is widely seen as a test case for the Kingdom of Saudi Arabia (KSA). It is an open secret Bahrain could never have launched diplomatic relations with Israel without KSA’s tacit approval. Therefore, the next batch of countries to launch diplomatic relations with Israel will also only do so, once KSA sanctions it. As of this writing in March 2023, Chad, Oman, Mauritania, Niger, Somalia and Indonesia are reportedly on the list that will be encouraged (read “bribed”) into normalising ties with Israel.
TURKIYE: As one of Israel’s top 10 trading partners, Israel’ relations with Türkiye meanwhile can be best described as hot and cold. In June 2016, Israel and Türkiye announced plans to restore diplomatic ties but broke relations in December 2017 when the United States formally recognised Jerusalem as the capital of Israel. Following what is seen as a reasonable lapse of time, Türkiye and Israel in August 2022 agreed to restore full diplomatic relations, and will likely keep relations depending on the political expediency of the arrangement for Türkiye. Meanwhile, Türkiye remains one of top 5 markets Israel imports from.

ECONOMIC FOUNDATION:

In 1952, Israel and West Germany signed an agreement stipulating that West Germany was to pay Israel for the persecution of Jews during the Holocaust, and compensate for Jewish property stolen by the Nazis. Over the next 14 years, West Germany paid Israel 3 billion marks (equivalent to US$111.5 billion in modern currency).

The reparations became a decisive part of Israel’s income, comprising as high as 87.5% of Israel’s income in 1956.

In 1950, the Israeli government launched Israel Bonds for American and Canadian Jews to buy. In 1951, the final results of the bonds program exceeded $52 million. Additionally, many American Jews made private donations to Israel, which in 1956 were thought to amount to $100 million a year. In 1957, bond sales amounted to 35% of Israel’s special development budget.

Later in the century, Israel became significantly reliant on economic aid from the United States, a country that also became Israel’s most important source of political support internationally.

The proceeds from these sources were [judiciously] invested in industrial and agricultural development projects, which allowed Israel to become economically self-sufficient. Among the projects made possible was the Hadera power plant, the Dead Sea Works, the National Water Carrier, port development in Haifa, Ashdod, and Eilat, desalination plants, and national infrastructure projects.

ECONOMY TODAY:

Prior to Covid-19, Israel used to average $100 billion (€83.5 billion) in foreign direct investments (FDI) each year. With strong dollar reserves, sound macroeconomic fundamentals and a reasonably strong shekel, the numbers in Israel has never looked this good.

Israel has a workforce over 4 million+ workers that includes over 107,000+ millionaires out of a population of 9.7 million, or one for every 90 persons in Israel. Nearly 90 percent of Israel’s total income tax revenue is earned by just 20 percent of the population while half of Israel’s population (that earns on average 57,900 shekels per year) pays no income tax at all.

In fact, Israel’s GDP stands tall at over $58,273 per capita (2023 est.), or sits comfortably in the top ten range globally.

As a side note comparison, Gaza which is under a 17-year Israeli imposed blockade and West Bank where Israel controls almost every aspect of life since its illegal occupation in 1967, averages US$3052 per capita (2021).

Nonetheless and given the rising levels of disposal income within Israel, the cost of living has gone up significantly over the last 20 years. In fact, 17.9% of the population live below the poverty line today, with 60% of the poor households in Israel among the orthodox Haredi Jews and Israel Arabs.

The Haredi Jews (14% of the population) want to study and pray all day and the Israeli Arabs (20% of the population) face limited work opportunities and embedded racism across the social and economic strata.

HOUSING:

With a growing population including the integration of nearly a million Jews from the former Soviet Union in the 1990s and from elsewhere around the world before and after, Israel needs to build between 50,000 to 70,000 new housing units per year.

The government however does not build nearly as enough housing units because local municipalities have a natural incentive of building commercial properties (pay much higher taxes to the state ) rather than residential properties.

Unless and until this is fixed, there will always be a housing shortage in Israel, while rents will continue to be high and the younger generation will remain priced out of buying themselves a home.

DEMOGRAPHIC:

The immigrant Jews from USSR has played a key role in helping transform Israel’s economy today:

“Waves of Jewish immigration, predominantly from the countries of the former USSR, brought over one million new citizens to Israel. These new Soviet Jewish immigrants, many of them highly educated, had a wellspring of scientific and technical expertise to help spur Israel’s burgeoning technology sector, now accounting for 15% of Israel’s population.”

Given such:

“Above all, Israel must continue its balancing act of condemning Russian abuses in Ukraine while cajoling its diplomatic relations with Moscow, in order to continue bringing Jews out of the country, and to guarantee its freedom of action against Iranian and pro-Iranian forces in Syria.”

In fact, given the persecution of the Jews across Europe especially in 1800s and 1900s, the “ingathering of the exiles” is often cited as raison d’etre (justification for existence) of the Jewish state.

Since 1948 therefore, Israel has absorbed more than 3 million immigrants, rising from approximately 300,000-600,000 between 1948-1952, and then quadrupling to 3 million immigrants over the last 75+ years. Israel today has a population of 9 million today.

GNP per capita meanwhile has propelled from US$600 to US$40,000+, for Israelis in Israel (note: Palestinians living under the illegal occupation survive on $3,000 GDP per capita)

Nonetheless, there are today primarily two groups of Jews in Israel:

The Western-oriented (higher up on the social ladder and traditional supporters of secular parties) population segment, living in the center such as in Tel Aviv and Jerusalem, usually termed “Ashkenazi”.
The other group are the Eastern-oriented (religiously observant, broadly not as economically well off and traditional supporters of right-wing parties) population segment, living in the periphery or south and north of Israel, usually termed “Sephardi.”

TECH SECTOR:

Moniker of Start-Up Nation: Since the 1990s, Israel’s tech industry, based primarily in Tel Aviv’s Silicon Wadi and elsewhere has grown leaps and bounds.

Today, the tech sector not only accounts for more than half of the country’s exports but also accounts for up to quarter of the country’s income taxes (thanks to its high salaries) and employs well over 10% of the country’s salaried workforce, or 400,000+ people.

With one of the world’s most thriving tech ecosystems and more than 7,000 start-ups, the key sectors among 700+ leading tech companies in Israel include cybersecurity, fintech, IoT (the “internet of things”) and food tech, as well as the emergence of a new sub-sectors like ‘climate tech’.

In fact, many founders of cyber security companies like Argus, Check Point, and Cyber Ark previously served in the elite Unit 8200, the secret intelligence unit within Israel prior to launching their tech companies.

To date, Israelis have created more than 90 so-called unicorns or privately held companies valued at more than $1 billion, including Wix.com, Moon Active; and eToro, many previously part of the prestigious Unit 8200 within the Israel Defence Force (IDF), arguably one of the world’s most efficient but ruthless and immoral armies.

54 percent of Israel’s exports are said to be high-tech products and services and in 2021 Israeli firms raised an extraordinary record sum of over US$25 billion, surpassing the US$10 billion raised in 2020.

Thanks in large part to having the world’s highest ratio of R&D expenditure to GDP (nearly 5%), much of the country’s high-tech sector that accounts for 15.3% of the country’s GDP is the main engine of economic growth, funded by foreign investors, unable to escape the allure and profit potential of the Israeli tech industry, which is second to none.

This is why reports of Israeli companies pulling their funds out of Israel in January 2023 was not as worrisome as the negative impact of investors pulling out of Israel, should the government managed to clear three Knesset plenum votes to pass the controversial bill into law, giving the Knesset the power to overturn supreme court rulings, upending the checks and balances in Israel.

EXPORTS OVERVIEW:

Exports account for 33 percent of Israel’s GDP, with a whopping 25 percent going to U.S. alone. This over-reliance on a time-tested ally can be great on good days but a bit of a risk (8.25% of Israel’s GDP) whenever the U.S economy slows down.

CHINA:

Israel therefore has been spending tens of millions over the last 20+ years, training its diplomatic corps and pivoting its exports away from the U.S & Europe and focusing on China (which today accounts for 10% of Israel’ total exports) focusing on high-tech goods, machinery and chemicals.

China is quite happy with the arrangement as Israel (based on 2021 numbers) exports 7.3% to China while Israel imports 18.7% from China, giving the Chinese access to world class technologies it may or may not be able to access, directly from Western markets.

Computing services, electronic components, communications equipment, precision and medical equipment, diamonds, and agrochemicals, Israel is a god-sent for China.

Israel began selling military technology such as missiles, radars, and navigation systems to China in the 1980s, long before Beijing recognized Israel as a state, according to the Council on Foreign Relations. In the 1990s, Israel is reported to have sold at least US$2-3 billion worth of hi-tech military equipment to China, seriously undermining U.S efforts to limit the sale of advanced weapons to the Chinese.

This went on for years, including providing the specs for the Israeli Lavi, which itself was modelled upon the U.S. F-16 Fighting Falcon multi-role aircraft, helping China build a new generation of fighter aircrafts. The sale and the technology know-how was a huge controversy in the United States at the time.

Between now and then, a few arms deal were cancelled, a dozen-odd Israelis were periodically indicted for exporting sensitive technology to China while a few people in position of power were replaced to assuage U.S concerns but the policy albeit slightly tweaked has largely been the same.

Meanwhile, Israel has learnt how to walk a tightrope between its strongest ally and China, a willing backdoor buyer for U.S technology and has only made further inroads into China, more than tripling its tech exports into China.

In 2013, secret U.S. missile and electro-optics technology was transferred to China by Israel, again prompting anger from the U.S. and it is an open secret this continues to this day, with the U.S still continuing to struggle steering Israel’s tech industry away from China, according to Bloomberg in July 2022.

Fast forward to 2023, China now leads the world in 37 out of 44 critical technologies, according to leading think tank Australian Strategic Policy Institute (ASPI). The lead includes its unique dominance spanning defence, space, robotics, energy, the environment, biotechnology, artificial intelligence (AI), advanced materials and key quantum technology.

While this involved a lot of hard work, intensive R&D and long term planning on the part of the industrious Chinese government spanning decades, foreign companies that establish presence in Israel ought to closely examine Israel’s track record of (1) spying against the U.S (Jonathan Pollard), let alone (2) leaking proprietary technology China prior to setting up shop in Israel.

In fact, as recently as March 2023, NFV Systems, a previously unknown company was identified by a Defense Ministry investigation on suspicion for selling sensitive military technologies to some countries in the Middle East.

This is a case of one company that was flagged. Imagine how many Israeli companies operate below the radar, so to speak.

TOURISM:

Tourism accounts for an average 2% of GDP and the bulk of it is driven by religious tourism.

For example, Israel is a major tourist destination, especially for those of Jewish ancestry, with 4.55 million foreign tourists visiting the country in 2019, contributing 20 billion to the Israeli economy. The largest percentage of tourists usually come from the United States accounting for up to 20% of all tourists, followed by Russia, France, Germany, the United Kingdom, China, Italy, Poland, and Canada, or countries with a known Jewish population.

On the other hand, there are many Christian holy sites including the Church of the Holy Sepulchre in Jerusalem, the Church of the Nativity in the West Bank town of Bethlehem, and the Basilica of the Annunciation in Nazareth, Israel.

For Muslims, the most visited Islamic religious places are the Masjid Al-Aqsa (the Temple Mount) in Jerusalem, and the Ibrahimi Mosque at the Tomb of the Patriarchs in the West Bank town of Hebron, and others.

In March 2021, the Centre for Research on Multinational Corporations published a noteworthy report that stated:

“Tour operators across Europe and North America are deceptively offering unsuspecting consumers misleading package tours to Israel and Palestine. These tours are labelled as destined to ‘Israel’ but actually include locations in the occupied Palestinian territory (OPT), and in the occupied Syrian Golan. Many include illegal Israeli settlements, which are the source of a wide range of serious human rights violations suffered by Palestinian communities and the Palestinian people as a whole.”

Nevertheless, tourism numbers are likely to remain steady given the well-funded and highly organised Israeli PR machinery behind it.

UPSIDE	DOWNSIDE
Strong scientific environment & competitive high-tech sector	Shortage of workers
The world’s highest ratio of R&D expenditure to GDP, across seven universities with leading research institutes.	No additional research university in 4 decades although GDP has double, and the population is 2.5x bigger and country is wealthier
Low unemployment rate and high wages	High cost of living
Resilient, and highly integrated into global trade	Concentration of exports & economic dependence on the U.S & West
Diversified economy	Small economy
Decreasing public debt to GDP ratio	High short-term external debt
The rule of law is well established, the judiciary is independent	Overhaul of Israel’s justice system (Nov 2023) would grant the Knesset the power to overturn supreme court decisions upending Israel’s democratic system of checks and balances.
Plenty of commercial real estate	Shortage in housing sector due to mismatch preference for commercial real estate that pay higher taxes
Entrenched democratic system, including peaceful transfers of power.	Frequent turmoil within coalition governments; Fragmented political landscape; Political instability and frequent snap elections
Unwavering U.S. political and economic support, including grants and aid	Risk that U.S grants and aid could be revoked someday
Strong and advanced military	Regional instability and conflicts contributing to security concerns
Establishment of diplomatic relations with some Arab countries, supporting investment opportunities	Dangerous geopolitical environment
The Heritage Foundation’s ‘Index of Economic Freedom’ survey ranks Israel 26th out of 184 countries.	This applies only to Israel, not to the Palestinians who live under the illegal occupation, and whose livelihoods are under the hegemonic control of Israel
Israel ranks well with energy intensity, CO2 emissions and climate change vulnerability	With a moderate recycling rate and a high water stress level, Israel ranks only 155th out of 210 economies in the ‘Environmental Sustainability Index’