Israel's foreign currency reserves totaled U.S.$ 42.5 billion at the end of 2008
The Bank of Israel reported yesterday that its foreign currency reserves grew by U.S.$ 14 billion in 2008 and totaled U.S.$ 42.5 billion at the end of 2008.
The Bank of Israel said that the growth in reserves last year is mainly the result of purchases of foreign currency by the Bank of Israel since the first quarter of 2008 as part of a program to increase the Bank's foreign exchange reserves. Last year U.S.$ 12.1 billion was purchased.
For the first time in the past decade, the average level of foreign exchange reserves in December 2008 covered all the short-term external debt of the economy - 103%, compared with a level of coverage of around 80% in previous years, and this amount is equivalent to 4.8 months of imports, compared with 4 months on an average during 2007.
Despite the severe global financial crises since last year, Israel's foreign currency reserves were hardly affected. This is because they were invested in conservative assets as part of the Bank of Israel's policy of managing the reserves. In addition, the Bank took steps during the year to reduce the exposure of the reserves to increasing financial risks. As part of these steps, the banking exposure was reduced to less than one percent, the investment rules were made stricter, and additional restrictions were imposed on the assets permitted to be invested.
The holding-period rate of return on the reserves in terms of the numeraire was 5.9 percent in 2008, up from 4.5 percent on the average in the years 1999 - 2008. The rate of return was affected to a large extent by the decline in yields to maturity in the bonds market of the US government and other governments worldwide, against the background of the deepening global crises.
The contribution of active management last year was negative and totaled 19 basis points, in contrast to a positive average 9 basis points in the past decade. The negative contribution was affected mostly by the long-term spread assets in the portfolio, whose rate of return were less than those of government bonds because of the widening of the spreads between them. The contribution of active management, as well as its volatility which rose last year, were greatly affected by the dramatic changes that took place in the markets as a result of the global crises.
In the wake of the low level of yields to ,maturity which prevailed in the United States from the beginning of 2008, the duration of the dollar portfolio was reduced from 24 months to 14 months. This was due to concern that a rise in yields could cause large capital losses, greater than the income from interest, leading to a negative holding-period rate of return.
The events that took place last year in the world underscored that beyond the existence of an appropriate level of reserves, it is also of considerable importance for them to be sufficiently liquid in order to be able to cope in times of crises. This aim was particularly emphasized in the Bank of Israel's management of the reserves last year.
