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Israel’s New SWF Takes Shape

What does a country do with a windfall of $130 billion dollars? Such is the question Israel’s been asking itself lately...

What does a country do with a windfall of $130 billion dollars? Such is the question that Israel has been asking itself in the wake of two massive gas discoveries. In fact, one of the discoveries will be the biggest in the Mediterranean’s history and could dramatically alter the Israeli economy and society. This is why the country is talking seriously about setting up a new SWF:

“The cabinet announced Sunday its plan to create a sovereign wealth fund from future natural-gas and oil royalties.”

Smart. The purpose of such a fund will be to prevent the sudden influx of wealth from weakening internationally exposed industries as well as the costs of restructuring domestic industries and employment institutions. Such a fund could also help minimize the short-term costs of fluctuating revenues and ensure macroeconomic stability. For such a small economy, the volume and volatility of resource earnings could pose a threat to domestic economic stability, which means it’ll be wise to have a stabilization mechanism.

Anyway, it appears the Israeli government already gets it. Much of the money from the gas will flow directly into the budget, but a significant portion will in fact be squirreled away into a new SWF (specifically the revenues from the new “excess profit tax”). Here's a blurb from the Israel Ministry of Foreign Affairs:

“...the state will establish a sovereign fund to manage revenue from natural gas resources, with the fund's profits being invested in strategic projects for the State of Israel. This is in order to ensure the efficient and wise utilization of natural resources without harming jobs and competitiveness in the economy, while taking a long-range strategic view and in order to provide lasting economic security for the State of Israel.”

“...approximately half of state revenues from oil and gas resources (incomes from the tax on excess profits) will be deposited in a fund that will invest abroad and will constitute a "security cushion" for dealing with national events with extraordinary economic implications such as wars, natural disasters, economic crises, etc.”

“Pursuant to a decision by Prime Minister Netanyahu, the fund's profits will be devoted to designated projects in the fields of education and security, which will be approved by the Cabinet. Should an extraordinary event take place, it will be possible to borrow from the fund. The fund's assets will be managed, in accordance with rules that have yet to be determined, by the Bank of Israel under a supervision and oversight mechanism - to be led by the Finance Ministry - that will ensure maximum public transparency.”

So – like the Norwegian fund it’s based on – the Bank of Israel will manage the assets in the fund. And, apparently, the Bank of Israel will work with the National Economic Council to develop the investment strategy for the fund over the next year. It’ll be interesting to see what they come up with, as some estimates suggest the new SWF will have as much as $80 billion in AUM by 2040...

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