Strong shekel ‘murdering us,’ exporters complain as BoI banks on buying billions
Firms operating in shekels but paid in dollars say they’ll have to cut back or move away; a central bank plan to buy $30b to stabilize rate will help, but not enough, they say
Shoshanna Solomon was The Times of Israel's Startups and Business reporter
Marian Cohen, the chairman of Israel’s Mer Group, has overcome many crises in his 36 years at the tech holding firm, from rocket attacks hampering production and deliveries to a credit crunch in the Great Recession of 2008.
But the strengthening of the Israeli shekel against the US dollar is creating an “existential crisis” that outstrips those other challenges, he says, leaving him and other industrialists struggling for a response.
“In the first Lebanon war we knew we had to grit our teeth and go on, and during Operation Protective Edge there were rockets flying over Ashkelon,” said Cohen, 64, referring to the 1982 war and the 2014 Israel-Gaza conflict, respectively. “Both were existential crises, one could say. But we knew that it would end one day. During the 2008-2009 financial crisis we knew to take steps to ride the crisis out. But I have no idea when this shekel crisis will end. It is an existential threat and I don’t know how to handle it and I’m not sure I or others like me can handle it.”
The US dollar dropped this month to its lowest value against the Israeli shekel in the past 24 years, as the US currency has weakened globally on bets that President-elect Joe Biden will boost aid packages to help curb the economic wreckage caused by the coronavirus pandemic, flooding the market with dollars and diluting their power.
The weakened dollar has helped Israeli consumers and importers, but is devastating local manufacturers who rely on exports, and other businesses that get paid in dollars.
On Thursday, with $1 equal to NIS 3.116, the Bank of Israel made a dramatic move, announcing that it intends to purchase over $30 billion in foreign currency in 2021. But some manufacturers are skeptical that the move will be enough to pull them out of a tailspin.
The Bank of Israel’s signaling of its intention in advance, which Deputy Governor Andrew Abir called “an unusual step, for unusual times,” was made in hopes of keeping the shekel in check and stabilizing the exchange rate, as well as keeping multinationals from fleeing.
“The advance announcement of the scope of the purchases is intended to provide the market with certainty regarding the Bank’s commitment to dealing with the recent sharp appreciation” of the Israeli currency, the central bank said.
“The export sector is feeling threatened recently,” Abir told reporters, according to TheMarker financial daily. “We don’t feel we can play with the future of workers who see their livelihood in danger, especially in high-tech.”
The announcement caused the shekel to immediately fall to NIS 3.19 to the dollar on Thursday and by the weekend was trading at NIS 3.27 to the dollar, a 5% decline against the greenback, highlighting market confidence in the move. Economists at Bank Hapoalim Ltd. said Sunday they expect to see the shekel continue to weaken in the coming weeks, following the central bank’s announcement on Thursday.
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. In 2020, it bought a record $20 billion worth of dollars in the foreign exchange market, but the greenback still weakened 7.5% against the shekel over 12 months. The shekel has risen 23% against the dollar since 2015, according to data provided by the Manufacturers Association of Israel, before the Bank of Israel’s announcement on Thursday.
The shekel’s strength comes with the nation facing political instability, a national budget essentially held hostage by political machinations, and the coronavirus pandemic, which has caused one of the biggest economic crises in Israeli history.
Prime Minister Benjamin Netanyahu is being tried for corruption in three cases and the country, run by a dysfunctional government coalition that failed to pass budgets for 2020 or 2021, will hold its fourth general election in two years in March.
The budget deficit for 2020 was nation’s highest ever — NIS 160.3 billion ($50.4 billion), or 11.7% of its GDP, some three times higher than the deficit a year earlier, the Finance Ministry said last week.
The treasury estimated that GDP for the year contracted by some 3.3%, and the Central Bank estimated the drop at 3.7%, both of which are still better than some earlier gloom and doom forecasts that predicted a drop of as much as 7%.
The coronavirus pandemic has caused record levels of unemployment in Israel — 16% this year according to a Bank of Israel estimate. A strong shekel, which hurts exports, could hinder the economy’s recovery from the blow dealt it by the virus, central bank governor Amir Yaron has said.
Booming foreign equity markets are causing the shekel to strengthen against most currencies, as investors hedge their investments in foreign stock markets by selling foreign currency reserves.
In addition, Israelis are mostly eschewing travel because of the coronavirus, leaving at home some $3 billion worth of foreign currencies they normally spend abroad.
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. Natural gas production from massive gas fields since 2013 has also 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.
The signing of normalization accords with the UAE, Bahrain, Morocco and Sudan, with the promise of other accords to come, is also boosting the shekel by taking away some the geopolitical tensions that have traditionally weighed on the Israeli currency, said Terence Klingman, an economist and chief investment officer at the Heritage Family Office Partners Ltd., which advises wealthy families on where to invest their funds.
Always in survival mode
A strong shekel is good for Israeli consumers — it makes imported products and travel abroad cheaper. This will come in handy as the nation exits the coronavirus crisis.
But 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.
The firms have been forced to raise prices and become less competitive in the global market, or see their profit margins be whittled down, or a combination of the two. Companies are responding by cutting back on expenses, laying off workers or relocating to cheaper locations.
“Businesses are being murdered,” said Mer’s Cohen.
Mer Group has global subsidiaries in a variety of business activities, from telecommunication infrastructure products to homeland security and smart city solutions, defense technologies and cybersecurity services. Set up in the 1980s as a family business, it is today a publicly traded company with a market capitalization of NIS 42.2 million ($13.4 million).
The company started its activities with sales in Israel and over the years has expanded overseas. “Seventy percent to 75% of our turnover is generated abroad, and 90% of our profitability is from foreign sales,” said Cohen. But in the last few years, as the shekel has strengthened against the dollar, selling projects and products has become more challenging, he said.
“The dollar is becoming weaker and weaker, and our position versus competitors is getting weaker too,” he said. “Industrialists are always thinking of how to cut costs and become more efficient; we are always in survival mode. But there is a limit to how much we can do. There comes a point when we have to fire workers — or, even worse, shut down operations. And that is not something temporary. A factory that has been closed will never reopen.”
Five years ago, Mer Group employed 1,550 workers globally, he said. That number is now down to 700 “because of the weak dollar.”
Similarly, the group has shut down operations of two antenna-tower manufacturing plants in Israel, and is now producing them in joint ventures abroad with Chinese, Turkish and Mexican partners.
It’s not only the weak dollar. Cohen says high local costs and a difficult regulatory environment in Israel have also hurt businesses.
Thursday’s announcement by the Bank of Israel is a step in the right direction, Cohen said. But monetary tools to curb the shekel are not enough, he added, urging a laundry list of other steps, like lowered taxes and a reduction in employer-funded benefits to remedy what he described as an environment in which firms were being hurt by business-unfriendly government policies.
“We are being burdened more and more, all the time,” he said.
The plight of the Israeli industrialists is falling on the deaf ears of a dysfunctional government, he said. “There is no one to talk to. We don’t burn tires or block highways in protest. But processes are underway, and closures will follow. We must protect our future.”
A mixed bag
Just as the government come up with a variety of programs to protect the economy from the pandemic, it must now find a “vaccination for the economy” against the strong shekel, said Netanel Haiman, head of the economics division at the Manufacturers Association of Israel. “If they don’t understand that we have an emergency here that needs addressing, then all the efforts to get the economy and employment back on track will be hurt.”
The effects of the shekel on exports are not immediate; rather, they will trickle down slowly, Haiman said. “You may not see the depth of the problem in the daily data, but it will emerge eventually. The situation is very bad.”
“It is a mixed bag,” said Klingman, the economist. Policymakers need to weigh a number of factors when mulling the shekel’s rise. On the one hand, a strong shekel will be good for consumers battered by the pandemic, as it will help them spend more on cheaper imported products. On the other hand, it is bad for manufacturers whose production plants are mainly in Israel and who rely on exports.
Fast-growing tech firms in Israel have seen strong sales growth, which is helping them outpace the weakness of the shekel, he said. The companies that are most affected are those that have been around for a number of years and that see lower growth margins, and the more traditional industries, where revenue growth is slower. “They are facing double headwinds, because of shrinking demand due to the pandemic and the strong shekel.”
Economists have been talking about a “K”-shaped recovery from the pandemic, with some industries recovering swiftly and others lagging, and Klingman beleives exporters will also see a “K”-shaped recovery — from the pandemic and the strong shekel: Mid-cap firms that have set up operations abroad and are manufacturing globally to be close to their markets will recover faster than those that only produce in Israel.
“These will be the most challenged,” he said.
Romold Technologies Ltd., a maker of plastic products for the construction, sewage and telecommunication industries, was founded in Israel in 1992 and is now owned by Romold GMBH in Germany.
The firm currently exports some 25% of its products. “A few years ago, our exports accounted for 70%-80% of our sales,” said CEO Dovi Frumovich, who has led the firm for the past 15 years. “It has become very expensive to produce here, so we have moved production to Germany and the Czech Republic.”
For each $1,000 of products sold, the company used to get around NIS 4,000 shekels, which would go to pay local salaries and other costs. Now, for each $1,000 worth of products sold, the firm gets only some NIS 3,200, he said, because of the shekel’s appreciation. Meanwhile, local costs, in shekels, are high. The minimum monthly wage in Israel is NIS 5,300 ($1,600) a month (equivalent to about $9.25 an hour), municipal and other taxes are high, and regulation is burdensome.
“I can’t ask my customers to pay more because of the high shekel,” Frumovich said. “It is not their problem. Once we had trouble competing with Asian firms or Turkish companies. Now I can’t compete against European or US manufacturers, either.”
The firm has cut back some 20% of its workforce in Israel in recent years, from 100 workers to 80, and Frumovich said if things don’t change he will continue to move operations abroad.
“The government must decide if it wants an industry in Israel or not, and if yes, it must support it,” he said. The size of the local market is small and companies cannot survive by just selling locally. They must be able to export, he says.
The Bank of Israel’s interventions in the foreign currency market help a bit, but “it should be doing much more,” Frumovich said. He admits, though, that “it is not easy to control the currency fluctuations.”
Like Cohen, Frumovich says the government should be helping businesses in other ways than just trying to control the shekel, such as by lowering taxes and easing regulation, he said.
“It took me four years to move my plant in Israel from one location to another. It took me 11 months to build a new factory in Austria,” he said.
On January 12, the Globes financial website said that US cybersecurity software provider McAfee will be shutting down its development center in Tel Aviv to cut costs, mainly as a result of the strong shekel.
That same evening the Israeli High-Tech Association, an umbrella group for the tech industry that is part of the Manufacturers Association, convened a committee meeting.
“There was full attendance,” said Cohen, the Mer Group chairman. “Everyone is frustrated and disgruntled. And that is because there is no one to talk to. We can make all kinds of suggestions and proposals, but there is no one on the other side who is listening.”
