Why, amid collapsing economy wracked by COVID, is shekel near a 12-year high?

The shekel-dollar rate went below psychological threshold of NIS 3.40 to the dollar on September 1, the Israeli currency’s strongest level since July 2008

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

Illustrative photo of 200 new Israeli shekel bills, February 7, 2016. (Nati Shohat/Flash90)
Illustrative photo of 200 new Israeli shekel bills, February 7, 2016. (Nati Shohat/Flash90)

A. Grebelsky & Son, an Israeli firm whose “Jerusalem of Gold” limestone is installed across the US, from HBO’s headquarters in California to the Metropolitan Museum of Art in New York, is finding it hard to keep its prices competitive, now that the shekel has shot up against the dollar.

“Running the business has “become almost impossible,” said Hanan Grebelsky, the grandson of the firm’s founder.

“All our workers are Israeli; all our expenses are in shekels and our revenues are in dollars. The stronger the shekel, our competitive edge gets hit,” as it makes the firm’s product more expensive to the US buyer; some 80 percent of the company’s sales are to the United States, with the rest going to Europe, Russia and Australia. “The higher our price the more niche market our product becomes. Only those who are ready to pay more will buy it.”

The shekel-dollar rate went below the psychological threshold of NIS 3.40 to the dollar, hitting NIS 3.3465 to the dollar on September 1 — the Israeli currency’s strongest level in 12 years, since July 2008. And the strengthening trend is set to continue in the longer term, a Bank Hapoalim  economist predicts.

Hanan, left, and Arik Grebelsky of the Jerusalem Gold stone manufacturing firm A. Grebelsky & Son. (Courtesy)

The currency’s strength comes even as the nation faces political instability, a health pandemic and the biggest economic crisis in its history. Prime Minister Benjamin Netanyahu is being tried for corruption in three cases and the government has been rendered impotent by a non-functional coalition.

Israel is struggling with record infection rates in a second wave of the coronavirus. Its economy, in a best-case scenario, is expected to contract by 4.5 percent this year, or by 7% in a more pessimistic scenario of the Bank of Israel in case the pandemic is only partially brought under control. In the Bank of Israel’s optimistic scenario for the economy, under which the pandemic is brought under control, the budget deficit this year is expected to be 13.2 percent of GDP, and the debt-to-GDP ratio is expected to be 75%, as opposed to some 60% in 2019, pre-coronavirus.

So why is the shekel so strong? And what are the implications of its strength for the economy?

Victor Bahar, the chief economist at Bank Hapoalim, said in a phone interview that the recent spike of the shekel against the dollar is largely attributable to the fact that Israelis spent their summer holidays stuck at home instead of going abroad.

In the third quarter of the year, Israelis normally spend the equivalent of $3 billion abroad, he said. “Now they are at home, because of the coronavirus pandemic, and the $3 billion worth of foreign currencies they normally spend outside remains in the local market.” Spending money abroad means buying dollars or other foreign currencies, he said, which directly impacts the nation’s balance of payments current account, as money spent abroad is considered imports.

The recession caused by the coronavirus, which saw GDP contract in the second quarter by 28.7% in annual terms, is also causing consumers to spend less on things like cars, air conditioners and other imported items, he said, curbing the need for foreign currency to pay for these items.

A third reason, he explained, is the fact that foreign equity markets are booming.

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

“There is a high correlation between the performance of the equity markets abroad and exchange rates,” he said. “When stock markets rise, then the shekel becomes stronger. When stock markets decline, like in March and April this year, then the shekel reached 3.90 to dollar. In the past few months, until the last few days, the stock market in the US broke records, and rose more than the stock market in Israel. And this creates pressure for appreciation.”

This is because when stock markets abroad rise, Israeli institutional investors pile their funds into these markets, buying shares. When the value of these assets rises, as tech shares did in the US markets until recently, it changes the balance of their portfolio, increasing the exposure of these investors to foreign currencies, like that of the dollar. To offset this exposure, these institutional investors thus sell some of their foreign currency reserves.

“The investors hold on to their stock, but sell dollars to offset this exposure,” he said. “They want to control their total exposure to foreign currency.” The hedge is not only against the dollar, of course, but most investments are dollar-denominated.

The recent decline of the US stock market helped weaken the shekel a little in the past few days. On September 9, the shekel’s representative rate was set at 3.4070 against the dollar.

Kobby Levi, the head of markets strategy at the Capital Markets Division of Bank Leumi Le-Israel, said that the most recent rise of the shekel against the dollar is not so much because of the shekel’s strength but because of the weakness of the dollar globally.

Indeed, compared to the euro, the shekel has weakened in recent months, he said. The shekel is trading at around NIS 4 shekels to the euro, compared to NIS 3.7 to the euro before the start of the spread of the virus mid-February.

The weakness of the dollar stems from the fact that interest rates in the US have declined to near zero, making it less attractive for investors to buy the currency, and also because the US is mired in political uncertainty regarding the election’s outcome and in a health emergency brought on by the pandemic. Interest rates are likely to stay low for years as the US economy struggles with the blow dealt by the coronavirus, Federal Reserve Chairman Jerome Powell said earlier this month.

Kobby Levi, Head of Markets Strategy,
Capital Markets Division, Bank Leumi Le-Israel (Courtesy)

“In the world there are more concerns today than before regarding the fiscal and monetary expansion in the US — how long can it continue, and what will happen if there will be political change in the US – all of these weigh on the dollar,” Leumi’s Levi said.

“The bottom line is that the strengthening of the shekel vs the dollar is not due to the strength of the shekel or the Israeli economy but from the weakness of the dollar in the world,” he said.

That may be so, but the shekel has crept up to record levels over the last 10 years, ranking among the strongest currencies in the world.

From December 31, 2018, to September 9, 2020, the Israeli shekel has appreciated 9.5%, the most against the dollar, compared with six other major currencies: the euro, the UK pound, the Australian dollar, the Japanese yen, the Swiss franc and China’s renminbi, data provided by Bank Hapoalim shows. The Swiss franc appreciated 6.5%, the yen 3.2%, the euro 2.5%, and the renminbi 0.2%. The UK pound weakened against the dollar by 1.5% for the period, and the Australian dollar weakened 2.7%.

Even the massive acquisition of dollars by the Bank of Israel — intermittently since the March 2008, to keep the shekel in check — has not managed to curb its rise. The Bank of Israel’s foreign exchange purchases in August totaled $2.6 billion, the central bank said on Monday, bringing its total foreign exchange reserves to almost $162 billion. The reserves aee actually held in many currencies and translated to dollars at a spot exchange rate.

“The intervention of Bank of Israel in the forex market can slow down the strengthening of the shekel, but history tells us it cannot turn it around on its own,” said Leumi’s Levi.

That is because the shekel is buoyed by the strong fundamentals of the Israeli economy, said Hapoalim’s Bahar. 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. Natural gas production from its massive fields since 2013 has also helped to cut back on energy imports, he said, and savings by households in Israel, in savings and pension plans, is high. All of this impacts the nation’s current account, giving it a surplus.

Israel’s offshore Leviathan gas platform. (Albatross)

“This situation of surplus in the balance of payments current account is not transitory, it is structural, at the basis of our economy. That won’t change so fast,” said Bahar.

Indeed, the nation’s strong fundamentals are expected to continue to boost the shekel even in the coming years, Bahar said. “The fundamentals support a strong shekel,” he said. “We expect it to be even stronger in two years from now,” with short-term fluctuations affected mainly by the performance of global stock markets.

Bank Leumi forecasts that the shekel will trade in the range of NIS 3.30-NIS 3.50 to the dollar on average until the end of 2021, depending on the volatility of the financial markets, and political and economic developments.

The strong shekel is good for Israeli consumers, Bahar said. It allows them to buy cars, TVs, and travel abroad inexpensively. But it does badly affect exporters, and the Bank of Israel is intervening in the market to help make sure that whole industries that are struggling because of the exchange rate “won’t be wiped out” because it will become too unprofitable to manufacture here.

The coronavirus pandemic, with the health havoc and the global recession it has wrought, has exacerbated difficulties for Israeli manufacturers and exporters.

Netanel Haiman, the head of the economics division at the Manufacturers Association of Israel (Courtesy)

“We are feeling like a forceps effect,” said Netanel Haiman, the head of the economics division at the Manufacturers Association of Israel. “We are getting it from both directions,” with shrinking global demand due to the recession adding woes to companies already struggling with low competitiveness due to the strong shekel.

“This might push people to set up their manufacturing facilities abroad,” he said.

“The plunge of the dollar is deepening the crisis and hurting even more the chances of the Israeli exporters to survive,” the industrialists said in a letter they sent last month to the Finance Minister, in which they called on the ministry to help cut costs for exporters by lowering water, energy and municipality fees.

The Bank of Israel could also help by intervening more aggressively in the market, Haiman said; it could  “be crazier” and surprise the market more than it is doing now, to make clear that it will not stand for a further appreciation of the currency.

“We are talking with the Finance Ministry and the Bank of Israel,” he said.

Supporting manufacturers and exporters is a key way to help Israel get out of the coronavirus-induced crisis, he said, and get people back to work, as the nation faces record levels of unemployment.

Labor Force Surveys conducted by the Central Bureau of Statistics showed that the “broad unemployment rate,” which includes the unemployed, those temporarily absent from work for reasons related to COVID-19, and those dismissed from their positions between March and July who are not looking for work, was about 12 percent in July for those aged 15 and above, the Bank of Israel said.

“This is an employment crisis,” Haiman said. “Strengthening the industry will create the engine to get us out of this crisis.”

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