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BANK OF ISRAEL
Office of the Spokesman and Economic Information
Press Release
March 20, 2013
Report on the Investment of Israel's Foreign Exchange Reserves in 2012
The annual report on the investment of Israel's foreign exchange reserves for 2012
was published today1, the following are the main points in the report:

Israel's foreign exchange reserves increased by about $1 billion in 2012, compared
with an increase of about $4 billion in the previous year, and at the end of 2012
they totaled $75.9 billion.2 In 2012, the Bank of Israel did not intervene in the
foreign currency market, after continuous interventions from March 2008 through
July 2011.

This year, the holding period rate of return on the reserves, in terms of the
numeraire3, was 1.59 percent, compared with 1.18 percent in the previous year
and around 2.95 percent, on average, between 2003 and 2012. As in 2011, this
return was affected to a large extent by the low level of interest rates and yields to
maturity in financial markets, and by continued management of the reserves with
a shorter duration than in previous years.

The active management contribution in 2012 was 117 basis points, more than 3
times the average of the past decade. Half of the contribution was derived from
the asset management of the portfolios of currencies included in the numeraire
(Dollar, Euro and British Pound)—primarily the investment in spread assets,
which are not included in the benchmark and which yielded excess return over the
benchmark assets, as the spreads narrowed during the year. The other half of the
contribution derived primarily from the investment of part of the reserves in
countries whose currencies and assets are not included in the numeraire and the
benchmark. This contribution was composed of exchange rate differentials in
favor of these currencies, relative to currencies included in the numeraire and by
outperformance of the assets in those countries relative to the benchmark assets.
1
The Hebrew version of the report was published today. The English version will be available within
several weeks.
2
The level of the reserves includes allocations of Special Drawing Rights by the International
Monetary Fund to member countries (SDR Allocation) and Israel's balance of the Reserve Tranche of
the Fund. At the end of 2012 these reached $1.8 billion, similar to the level at the end of 2011. For
more on this issue, see the Bank of Israel's Financial Statements for 2012.
3
The numeraire is a currency basket in which the foreign exchange reserves are measured. The
numeraire serves as the neutral currency composition of the reserves.

In 2012, the ratios between the reserves and various aggregates in the market
which are customarily used as the basis for assessing the adequacy of the level of
the reserves remained high. However, they did not approach the upper bound of
the distribution of these ratios in other countries. The high level of these ratios
strengthens the resilience of the economy in the face of crises, and improves
Israel's international financial standing.

The background conditions to the management of the reserves in 2012 continued
to be complex and volatile. In the first half of the year, the deterioration of the
crisis in Europe increased concern of the euro bloc breaking apart—a major risk to
the global economy. In the second half, this risk declined markedly due to aid
programs and to statements by the president of the ECB which contributed to
some calming of the markets, while macro data in Europe and around the world
remained weak. In the US, positive macro data throughout the year indicated a
slow and moderate recovery, while towards the end of the year, the problems
related to the "fiscal cliff" and the debt ceiling contributed to an increase in
uncertainty in the markets.

The debt crisis in Europe led to an increase in credit risk during the year, primarily
in eurozone countries, as well as worldwide, bringing with it ratings downgrades
by credit rating agencies. Accordingly, the Bank of Israel continued to reduce the
exposure of the reserves to countries for which the macro situation deteriorated.

The yields to maturity on government bonds, in countries in which most of the
foreign exchange reserves are invested, remained at low levels during the year,
and some even declined to negative levels. Thus, the main risk to the reserves
portfolio remained interest rate risk. The duration of the foreign exchange reserves
remained short, in order to minimize the capital losses in the event of an increase
in yields to maturity.

Concern over the realization of interest rate risk was at the basis of the Bank of
Israel's decision to invest this year, for the first time, about 3 percent of the foreign
exchange reserves in the US stock market; this was in order to improve the riskreturn ratio of the reserves.

During the course of the year, the diversification of the investment of the foreign
exchange reserves, which began in the middle of 2010, continued and was even
expanded to currencies and assets of several advanced economy countries with
relatively strong economic foundations and whose currencies are not included in
the numeraire and the benchmark. During 2012, the extent of the average
exposure to those countries was 9.7 percent, similar to the previous year.