AnalysisEconomic concerns mount as Israel faces drop in foreign investments and services export
Analysis
Economic concerns mount as Israel faces drop in foreign investments and services export
2023 ended with a sharp decrease of almost 29% in foreign investments in Israel compared to 2022. The decrease began long before the war, and is contrary to the global trend. An equally troubling figure is the 8% decrease in the export of services, which is a key generator of growth in the economy
The Netanyahu-Smotrich government is currently celebrating the political achievement of approving the amended state budget for 2024. However, even before the ink has dried, it is evident that the adjustment measures it includes are insufficient to address the significant and irresponsible deficit the government has created. While the government celebrates, it faces two more economic failures: a decrease in foreign direct investment (FDI) to 2017 levels and a decline in services activity, which has been the biggest growth generator of the economy for 16 years.
The past year ended with a sharp drop of almost 29% in foreign investment in Israel compared to 2022. Foreign direct investment refers to the purchase of an asset by non-Israelis, which allows the investor to receive voting rights on the board of directors and participate in the management of the company, in contrast to normal financial investments that do not grant ownership or influence over the same asset and are of a more temporary nature.
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PM Benjamin Netanyahu (right) and Finance Minister Bezalel Smotrich
(Credit: Haim Zach/GPO)
Foreign investments are essential for growth and economic development - they provide capital, new technologies, and managerial expertise. Also, they increase employment in quality jobs, encourage innovation, and increase productivity. According to the data of the Central Bureau of Statistics (CBS), foreign direct investments decreased in 2023 by 28.7% compared to 2022, from a level of $23 billion to only $16.4 billion. This is a little less than the $16.8 billion in investments registered in 2017, when Israel's accelerated economic growth began.
There are claims that the decrease is due to inflation and the interest rate increases that followed it. However, if this were the case and the decrease in foreign investments was explained by these global macroeconomic phenomena, then we should have seen a decrease in investments in the rest of the world and especially in the developed countries (including Israel, which belongs to the OECD), and this is because these countries usually receive more foreign investments compared to underdeveloped countries. However, according to a report by the United Nations Conference on Trade and Development (UNCTAD), the official institution that publishes FDI data in the world, in 2023 global foreign investments increased by 3%, while in the OECD countries the rate of increase was 28%. That is, the decline in Israel is a rather unique phenomenon and not part of a global trend.
Another excuse for the decrease in foreign investments is related to the claim that the drop is largely related to the war. This argument also does not align with the data: in the last quarter of 2023, the quarter in which the greatest security disaster in the country's history occurred, foreign investments were recorded in a high volume compared to the first quarter of the year. The volume in that quarter was only 2.5% lower compared to the second quarter. This means that the decline began even before the war.
A second figure that should worry the Israeli decision-makers in such a sensitive period is the drop in a major growth generator of the economy - the export of services, including high-tech services. A study by the International Monetary Fund (IMF) on the contribution of services to world trade already defined Israel in 2017 as a "global center of computing services". Between 2017 and 2022, Israel's services account (exports of services minus imports of services) recorded a cumulative jump of 193% - an average annual rate of almost 39%. In fact, starting in 2019, Israel became a services economy when its weight in exports exceeded the weight of goods. But in 2023, the jump stopped and we are witnessing a drop of almost 8%. This is a decrease that has not been recorded since 2007. Furthermore, there had been no decrease at all since 2009.
The reassuring news in this context is that the export of business services, which make up about 85% of the export of services, did not decrease but increased last year by 4.4%. Furthermore, the export of high-tech services, which constitutes 74% of the total export of business services, increased by 6.7%. The bad news lies in all the other service industries, which declined: tourism (inbound tourism), transportation (port activity), government services, and insurance services.
In this context, too, there is no room for claims of a global slowdown, since the peaks in the export of services were recorded precisely during the pandemic years - then there was a global recession that included most countries in the world. There seems to be a connection between the war and the decline in the export of services - mainly in inbound tourism and transportation services. However, the decrease in the export of services was also recorded in the third quarter of 2023 compared to the second quarter - so the trend started already before the war.
