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BOI: for Israel Capital Markets Decline Means Drop in Tax Revenues and Fewer Job Openings in High Tech

Bank of Israel

Bank of Israel Building Jerusalem (Wikipedia)

Israel Startup Nation has not been immune from the effects of the global economic crisis and the drops in the markets. The Bank of Israel (BOI) has released an important report on the health of Israel’s high-tech sector considering the current recession.

Israel Startup Nation is known for being the world’s biggest per capita success in the world of high-tech. Billions a year in new investments are brought into the country from foreign investors every year. But in the current crisis, it looks like Startup Nation may be turning into “close up nation.” The month of July saw about a dozen Israeli firms either lay off workers, cancel planned IPOs or see a drop in their valuations.

But now the Bank of Israel has some good news.

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2021 was a great year for startups in Israel. Valuations and capital raising of Israeli high-tech companies were much higher than the long-term trend, and a record number of Israeli companies held IPOs. During that year, demand for workers in high-tech continued to increase rapidly, and tax receipts from the industry were high.

But that all changed in 2022. At the beginning of the year, technology share indices in Israel and abroad dropped, and company valuations were cut. The number of sales of high-tech companies (mainly through IPOs) declined significantly. Capital raised in the first half of the year was higher than in most previous years, but lower than in 2021, and the slowdown is expected to continue, says the BOI.

This trend first began because of the supply chain problems caused by the end of the Covid shutdowns. This led to inflation. And to combat inflation countries raised interest rates, which cuts back on the money available for investments.

Then came the Russian invasion of Ukraine in March. This led to sanctions and an embargo on Russian oil. So the price of oil went up, feeding into higher inflation. And sanctions also meant that a great deal of money was unavailable for investments, including the wealth of the Russian oligarchs under personal sanctions.

The BOI found three main short term effects on Startup Nation due to these financial developments: (1) a decline in state revenue from taxes, mainly on income from the realization of capital gains; (2) a potential slowdown in hiring and a halt to wage increases among most firms; and (3) increased frequency of closures of firms with liquidity difficulties. The decline in the markets since the start of the year is expected to reduce foreign exchange conversions by domestic high-tech firms, and according to our estimate, the decline may reach about $700 million, or 0.16 percent of nominal GDP, compared to a situation in which the NASDAQ would remain at the peak reached at the end of 2021.

The Bank of Israel points out that Israel Startup Nation is more “mature” today in that most of the country’s high-tech sector firms are already well established. Only 11 percent of Israelis currently employed in the sector work for startup companies and these are the people at the greatest risk of losing jobs because of reductions in investments.

But even the loss of jobs in startups could actually be a good thing for Israelis. This is because, as the Bank of Israel explains, since Israeli high-tech in recent years has featured high demand for employees and a lack of skilled labor, it is likely that an adverse impact to employment among some firms in the sector would mainly be reflected in the transfer of employees to more stable firms, with less prolonged unemployment.

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