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Transactions in the financial account and the NIS/FX Market General Explanations
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General
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The layout of the tables is intended to facilitate two main kinds of
analysis: a. developments in capital flows between Israel and abroad
(the financial account), in accordance with the generally accepted
method of presenting balance of payments data; b. activity in the NIS/FX
market, within the analytical framework developed by the Foreign
Exchange Activity Department, which combines balance of payments
data with data on domestic foreign-currency transactions.
Whereas financial account data, as part of the balance of payments, focus on
transactions between residents and nonresidents, irrespective of the currencies
involved, data on transactions in the NIS/FX market are concerned with
currencies. This is because the object of presenting these data is to reflect the
activity that is relevant for determining the going exchange rate.
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The financial account (capital flows to and from abroad); Tables 1,2,3
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The tables of the financial account present Israel's activity vis-a-vis
abroad in the area of capital flows, and are prepared in accordance with
the approach accepted in the world for presenting balance of payments
data (version 5 of the IMF guidelines). Under these guidelines, capital
flows are incorporated in Israel's financial account, and include financial
transactions between nonresidents and, residents among them the
government and the Bank of Israel (in local and foreign currency).
Table 1 presents the main components of investment by residents and
nonresidents, and their net sum. Investment by nonresidents in Israeli assets, in
local and foreign currency, and in shares and bonds issued abroad by residents,
are presented in Table 2, while investments abroad by residents are given in
Table 3. The main classification of investments in these tables is by their
character: a. Direct investment and investment in untraded shares, real estate,
and traded shares by parties at interest; b. Portfolio investment-traded bonds
and shares-by parties which are not parties at interest; c. Other investments,
credit, and various kinds of deposits. Other major classifications in the financial
account tables include: breakdown of the various sectors in Israel as regards
investment abroad; differentiation between the various sectors in Israel in which
nonresidents invest; distinction between investment in debt instruments (bonds,
credit, deposits) and in capital instruments (shares); classification of investments
as negotiable and non-negotiable.
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Transactions in the NIS/FX Market; Tables 4,5,6
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The tables presenting transactions in the NIS/FX market detail the amounts of foreign currency sold or bought vis-a-vis local currency, in
the framework of financial and other transactions, by the various sectors, focusing on three main ones: the nonbanking private sector,
nonresidents, and banks. Activity in the market is implemented primarily between these three sectors, though also vis-a-vis the government
sector. Note that measuring the activity of the market is not effected from the technical standpoint of the action of exchanging local currency
for foreign currency and vice versa, but from the substantive standpoint of the use of the currency exchanged or purchased, i.e., by
sales/purchases of assets/liabilities in foreign and local currency by the
various sectors. This method of measuring and presenting activity in the
NIS/FX market creates interdependence between the net amounts of
foreign currency sold or bought by each sector, on the one hand, and
the change in exposure to that sector's NIS exchange rate, on the other.
This may be illustrated by the following example: a transaction involving
the purchase of a share in an Israeli firm (irrespective of where the
transaction takes place, in Israel or abroad) by a nonresident is regarded
as the purchase of an NIS asset, and hence as the sale of foreign
currency, regardless of the currency in which the transaction is
executed.
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Table 4 presents the main components of the transactions of the various sectors
relevant for the NIS/FX market, including the current account and capital flows
of the private sector.
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Transactions of nonresidents; Table 5 presents purchases and sales of
local-currency assets/liabilities of nonresidents, by type of asset and liability,
reflecting nonresidents' transactions in the NIS/FX market, since the base
currency of nonresidents is foreign currency. Local-currency assets include NIS
deposits and bonds in Israel as well as shares of Israeli companies traded abroad,
but do not include assets denominated in foreign currency, such as bonds issued
abroad by residents and foreign-currency deposits (nonresident deposits). Futures
transactions and Options1 involving the sale or purchase of foreign currency against
local currency are also included in this table.
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Transactions of the nonbanking private sector: Table 6 shows sales and
purchases of foreign-currency assets/liabilities of the nonbanking private sector,
by kind of asset/liability and by the sector with which the transaction was
implemented-reflecting the transactions of residents in the NIS/FX market,
because the base currency of residents is the NIS. The foreign-currency assets
and liabilities include transactions denominated in and indexed to foreign
currency with nonresidents and with banks in Israel, including NIS/FX futures
transactions (but not options).
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In the transition from the financial account data to those of the NIS/FX market
the following main changes are made:
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* Foreign-currency transactions between nonresidents and the government (primarily bond issues abroad) are omitted;
* Internal foreign-currency (denominated and indexed) transactions between the nonbanking private sector and the banking sector (primarily credit and deposits) are added;
* Futures transactions and Options1 for the sale and purchase of foreign currency against local currency are added;
* The classification of some of the items between sectors is changed.
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A full explanation of the difference between the definition of the financial
account and NIS/FX market transactions is given below:
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The distinctions and connections between the NIS/FX tables and the financial account tables
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Since the NIS/FX market tables (4–6) are intended to be used for analysis of the transactions of residents and nonresidents in that market,
and the connection between them and the NIS exchange rate, the data in these tables differ from those in the financial account tables (1–3),
which are part of the balance of payments and the National Accounts.
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The main differences and similarities between the two types of table are as follows:
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1. Transactions included in the financial account tables and excluded from the NIS/FX tables
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* Foreign-currency transactions between nonresidents and the
government of Israel include foreign-currency bonds issued abroad,
State of Israel Bonds, loans taken by the government abroad, and the
government's deposits abroad; direct receipts in foreign currency due
to the privatization of companies are included in the financial account
but not in the NIS/FX market, as the government does not buy or
convert foreign currency in the market;
* For the same reason the government's transactions in the current account,
which are included in the balance of payments, are not included in the NIS/FX
market, so that the NIS/FX market current account refers only to the private
sector;
* Similarly, transactions connected with the Bank of Israel's foreign-exchange
reserves, which are included in the financial account, are not included in the
NIS/FX market.
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2. Transactions included in the NIS/FX tables and excluded from the financial account tables
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* Foreign-currency transactions between the nonbanking private sector and the
banks in Israel, which include deposits and credit denominated in and indexed
to foreign currency, futures transactions and Options1 for the sale and purchase
of foreign currency against local currency, are included in the NIS/FX market
but excluded from the financial account because they are conducted between
residents only;
* For the same reason foreign-currency-indexed bonds issued by the government
and purchased by the private sector and the banks in Israel are included in the
NIS/FX market but not in the financial account;
* Futures transactions and Options1 between nonresidents and the banks for the
purchase and sale of foreign currency against local currency are included in the
NIS/FX market but not in Israel's financial account.
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Foreign-currency-indexed transactions are included in the NIS/FX market
because they constitute an almost perfect substitute for
foreign-currency-denominated transactions for the various players in the market.
In addition, transactions denominated in and indexed to foreign currency between
residents only and NIS/FX futures transactions are an important part of activity
in the market connected to the NIS exchange rate, but are not included in the
balance of payments.
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3. Transactions included in both kinds of table, but classified differently
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Transactions in foreign and local currency between nonresidents and
the nonbanking private sector and the banking sector are included in
both kinds of table, but some of them are classified differently in different
sectors. In the financial account the classification goes according to the
assets side, i.e., transactions in Israeli assets (in local and foreign
currency) are ascribed to nonresidents while those in foreign assets (in
local and foreign currency) are ascribed to residents. By contrast, in the
NIS/FX market the classification is by currency, so that transactions in
local-currency assets and liabilities are ascribed to nonresidents while
those in foreign-currency assets and liabilities are ascribed to residents.
This difference in classification derives from the fact that the point of
departure for nonresidents in their transaction in the NIS/FX market is
foreign currency, while that for residents is local currency. This
difference is expressed in the following main areas of activity:
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* Foreign-currency credit extended by nonresidents to residents, and
nonresidents' investments in bonds issued abroad by Israeli companies are
ascribed to nonresidents in the financial account, while in the NIS/FX market
they are ascribed to the nonbanking private sector;
* Foreign-currency deposits of nonresidents in banks in Israel (nonresident
deposits) are ascribed to nonresidents in the financial account, while in the
NIS/FX market they are included in the activity of the banking sector. All the
foreign-currency transactions of the banking sector are presented on a net
basis, as assets less liabilities (working capital);
* Local-currency credit extended by banks in Israel to nonresidents is ascribed to
the banking sector in the financial account, while in the NIS/FX market it is
ascribed to nonresidents (as a liability).
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To complete the picture, local-currency transactions of nonresidents, which
include shares of Israeli companies, local-currency deposits, Treasury bills, and
local-currency bonds, are ascribed to nonresidents in both kinds of table;
concurrently, transactions in foreign assets in foreign currency of residents,
which include foreign shares, foreign-currency deposits abroad, foreign-currency
credit to nonresidents, and foreign bonds, are ascribed to residents in both kinds
of table.
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1 OTC Options
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For additional information please contact:
Mr. Avi Schwartz - avischw@boi.gov.il
Ms. Shelly Reiss Bar-El - shellyr@boi.gov.il
Mr. Daniel Rosenman - rosenman@boi.gov.il
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