Inside story

Shekel climbs to 26-year high as Bank of Israel signals less intervention

Currency’s strength against dollar reaches level not seen in over 2 decades, and experts predict it is not going to stop there

Shoshanna Solomon

Shoshanna Solomon was The Times of Israel's Startups and Business reporter

Illustrative image of the 100 Israeli Shekel bill, on December 31, 2017. (Nati Shohat/Flash90)
Illustrative image of the 100 Israeli Shekel bill, on December 31, 2017. (Nati Shohat/Flash90)

Tourists beware. Looks like the next holiday to Israel, when COVID rules allow it, will be pricy: The shekel’s strength against the dollar reached a 26-year high on Wednesday, and experts predict it is not going to stop there.

The shekel representative rate closed at NIS 3.0740 to the dollar on November 17, the highest rate since 1995. Against the Euro, the representative rate was NIS 3.4767, the highest since 2000, according to data compiled by Bank Hapoalim. As of November 9, according to data compiled by Reuters, the shekel was the top-performing emerging currency since the pandemic started in early 2020.

Year to date, the shekel has advanced 4.2 percent against the dollar, and economists predict that all things equal, it may end up at NIS 3.0 to the dollar in a few months. The shekel’s representative rate on Thursday was set at NIS 3.0790 to the dollar.

The shekel has been going up for years, “but especially in the last few months and weeks,” said Paul Rivlin, an economist and a Senior Research Fellow at the Moshe Dayan Center for Middle East and Africa Studies at the Tel Aviv University.

As with all products, he explained, the price of the currency depends on supply and demand. And the high price of the shekel reflects the fact that the demand for the shekel is higher than supply.

“Why is there so much demand? Because Israel has a very significant and large balance of payments surplus on the current account. We are exporting more than we import,” and thus the demand for shekels to pay us for our goods and services is more than we are demanding in dollars to pay for foreign goods and services.

“Since the founding of the nation and until 2003, most years the opposite was true,” Rivlin said. The most recent move of the shekel, he said, stems partly from the fact that the central bank has suggested that it is not planning to intervene in the market as much as before to curb the shekel’s rise.

The central bank in January announced a plan to buy $30 billion in foreign exchange to curb the rise of the shekel after it bought $20 billion worth of foreign currency in 2020. Buying dollars to weaken the shekel is nothing new for Israel. The bank has purchased billions of dollars annually as part of a strategy first put in place during the global financial crisis of 2008.

Bank of Israel Governor Amir Yaron speaks during a press conference at the Bank of Israel in Jerusalem, on January 7, 2019. (Noam Revkin Fenton/Flash90)

But the $30 billion target was hit on October 27, and the central bank has not said it will extend the program, turning to ad hoc interventions instead, when needed.

“The program to buy foreign currency of the amount of $30 billion was an extraordinary measure for extraordinary times,” Amir Yaron, the governor of the Bank of Israel said at a press conference earlier this month. “The macro-economic picture of the economy as it exits the crisis is good: exports are rising fast, and a significant stream of direct investment continues. Part of the appreciation that occurred in the past few months is a result of these factors.”

Even so, Yaron added, “the $30 billion benchmark is not an upper limit on the bank’s intervention. We are constantly examining developments in the foreign exchange market, and the bank continues to conduct policy in accordance with the state of the economy and continued economic activity. We will not be indifferent to changes that are not consistent with the fundamental conditions of the economy.”​

There is “a psychological effect that has now come into play, as the forex [foreign exchange market] purchasing plan of the Bank of Israel has ended,” said Victor Bahar, the chief economist at Bank Hapoalim in a phone interview. “Players are saying that holding on to dollars has become riskier, let’s sell the currency right now, because the central bank has not committed to offsetting the rises as much as it did before.”

Victor Bahar, the chief economist at Bank Hapoalim (Inbal Marmary)

The central bank could decide to renew its purchases, and declare that it is will buy another $30 billion worth of foreign currency, Bahar said. But the appreciation trend “is difficult to fight. I believe the central bank will continue to intervene in the market but sporadically, from time to time, to temper the appreciation of the shekel over time. It won’t be buying $30 billion worth of forex, more likely around $10 billion a year, going forward.”

A combination of factors, besides the general global weakness of the dollar, has contributed to the crazy ride of the shekel against the dollar in recent years.

Booming foreign equity markets are causing the shekel to strengthen against most currencies, as institutional investors hedge their investments in foreign stock markets by selling foreign currency reserves.

The Nasdaq building in Times Square in New York. (littleny, iStock by Getty Images)

“In my estimate institutional investors have sold year to date some $30 billion worth of dollars to hedge their investments, and that has offset almost all of the dollar purchases made by the Bank of Israel this year,” said Hapoalim’s Bahar.

The shekel is also buoyed by the strong fundamentals of the Israeli economy. The nation has a big surplus in the balance of payments current account because its exports exceed imports, mainly due to its strong high-tech industry, which is seeing rapid revenue growth and is attracting large amounts of foreign investment.

The balance of payments, which is a statement of all transactions made between entities in one country and the rest of the world is made up of the current account, which includes the import and export of goods and services, and also the capital account.

“Both accounts have moved in a very favorable way, largely because of the high-tech sector,” said the economist Rivlin.

Indeed, “we are expecting between $35 billion-$40 billion of foreign investment this year, and all of this is because of the high-tech industry. Investors are putting money into Israeli companies because they are profitable and attractive,” said Rivlin.

The tech sector has helped the nation emerge from the ravages of the coronavirus pandemic, as the industry not only continued working during the pandemic, with employees plugging into their laptops from home, but also thrived, as demand for technologies surged as businesses, homes and schools all turned online during the pandemic, spurring demand for technologies.

A stock market ticker screen in the lobby of the Tel Aviv Stock Exchange, on March 9, 2020. (Avshalom Sassoni/Flash90)

This has caused foreign investors to pile money into Israeli tech firms, which raised a record $17.8 billion in the first three quarters of this year, 71% more than the amount raised in all of 2020, itself a record year.

In the last two years, net inflows of foreign investment to Israel increased compared to the past, said Kobby Levi, head of markets strategy at Leumi Capital Markets Division of Bank Leumi Le-Israel.

In 2020, Israel was added to the WGBI — the World Government Bond Index, which is an index that tracks government bonds of 24 countries.

“Israel’s inclusion caused a lot of foreign investors to start buying government bonds. And when they opened up their portfolios to the shekel and to Israel, they understood that there were a lot of other interesting ideas and other asset classes they could go into. So, we see a substantial increase of foreign investors in Israel. This year will probably sum up with about $30 billion foreign investments into Israel, not just into government bonds, but also in other asset classes too, compared to about zero net inflows into Israel in 2018-2019.”

Kobby Levi, Head of Markets Strategy at Leumi Capital Markets Division. (Kfir Sivan).

Also in aid of the shekel is the nation’s production of natural gas. The pumping of the fuel that started in 2013 has helped to cut back on energy imports, and savings by households in Israel, in savings and pension plans, are high. All of this impacts the nation’s current account, giving it a surplus.

Israel’s economy is expected to grow by 7% this year, according to the Bank of Israel, and 5.5% in 2022, after contracting last year because of the pandemic. The inflation rate is also expected to continue to increase this year, but to remain within the Bank of Israel’s target range of 1%-3%, and total 2.5% at the end of 2021. The broad unemployment rate, which surged last year, is expected to continue to decline and reach 5.2% at the end of 2022, the central bank forecast.

A strong shekel is good for the Israeli consumer and positive news for inflation, said Bahar.

“Without the appreciation of the shekel, inflation, which has risen some 2.3% this year, would have actually been around 4%,” he said. This would be a further incentive for the Bank of Israel not to intervene to curb the shekel appreciation, in a bid to keep inflation low.

“A strong shekel also lowers the prices of imported goods and makes us feel richer when we travel abroad,” said Bahar. “But it is bad news for exporters.”

Indeed, the rise of the currency spells disaster for local manufacturers and exporters, which pay workers, taxes and other expenses in shekels, but sell their products in dollars.

Nathaniel Hyman, director of the Economics Division at the Manufacturers’ Association of Israel. (Spokesperson’s office of the Manufacturers’ Association of Israel)

“We’ve had crises like these before,” said Nathaniel Hyman, director of the Economics Division at the Manufacturers’ Association of Israel. But this time the crises seems deeper. “The steep rise of the shekel, and the pace of change have been very problematic. We went from NIS 3.3/$ to 3.2/$, now at NIS3.06/$ more or less. Compared to 2019, this is a change of something like 20%.”

And when one looks at revenue, a 20% drop “is something that is very difficult for businesses to deal with, even if they can adapt on a productivity level, or introduce tech improvements. It’s almost impossible.”

The situation is causing “internal bleeding” for manufacturers, he said, and action is needed.

The tech sector is however less exposed to currency fluctuations, said the economist Rivlin. “High tech products are not that price-sensitive,” he said. “People want that product. Most tech products are services, they are tailor-made and their price matters much less than that of an orange or baked beans.”

Even with the strong shekel, exports of both goods and services have continued to rise, with the exports of goods higher than they were prior to the coronavirus crisis, Bank of Israel data shows.

This will make it even less likely for the Bank of Israel to come to the aid of the exporters.

Indeed, Governor Yaron said at the press conference that the role of the Bank of Israel is to look out for the exporters “but also the importers and the consumers.”

“In the long term, the shekel will continue to be strong,” said Modi Shafrir, the chief strategist at Mizrahi-Tefahot Bank. “The Bank of Israel cannot change the trend, because the fundamental forces are so strong. All it can do is mitigate the trend.”

Industrial exports will be hurt, but the government can take fiscal steps to help the industry rather than rely on the currency, Shafrir said. Like, for example, help the industry by lowering taxes or also providing them with other kinds of incentives to keep them chugging along.

A correction in the foreign stock markets could curb the rise of the shekel, said Hapoalim’s Bahar.

“If there is a correction in the global equity markets, if they drop by some 20%, then we will see a depreciation of the shekel. If the markets continue to rise or even remain stable, then we will see an even stronger shekel, and the currency could hit NIS 3 to the dollar within a few months.”

Ricky Ben-David contributed to this report.

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