Israeli reserves increase on higher equity prices

The Bank of Israel’s foreign exchange reserves increased sharply in July due to higher equity prices, the central bank reported on August 4.

The portfolio increased last month by more than $4 billion to reach $197.8 billion. This now represents 39.5% of the Israeli GDP.

The central bank explained this rebound was mostly due to the revaluation of its assets, which added $4.5 billion. This was partly offset by $208 million in private sector transfers and $280 million in government transfers to abroad.

Israel’s reserves portfolio has registered heightened volatility this year, partly as a result of the evolution of equity markets. As of the end of 2021, the Bank of Israel invested 18% of its portfolio in equities, 66% in government assets, 9% in spreads and 7% in corporate bonds.

Loose monetary policies adopted by central banks worldwide in order to tackle the effects of the pandemic boosted equity markets, which helped to bring Israeli reserves to a peak of $213 billion in December 2021 (see graph).

However, the policy U-turn implemented by the US Federal Reserve this year has contributed to falling equity prices. In June, Israeli reserves were recorded below $194 billion.

In July, global markets rebounded. Last month the MSCI World Index rose almost 8%.

Reserve managers adopting equities argue short-term volatility is offset by the longer-term returns these assets yield. For instance, although the MSCI World Index is down by almost 14% in 2022, its annualised returns over the last three years are 10.1%, and over the last 10 years 10.8%.