Why a Strong Shekel is Not Beneficial for Exporters

4 Mins read
Why a Strong Shekel is Not Beneficial for Exporters

The stabilization of the Israeli shekel against the US dollar has triggered an “existential crisis” that dwarfs the other problems. Marian Cohen, the chairman of Israel’s Mer Party, says that after the financial crisis of 2008-2009, they understood what steps to take to get through it. They do not, however, know when the shekel crisis will end. It’s an imminent threat, and no one knows how to deal with it for the whole team of experts. The US dollar fell to its lowest level against the Israeli shekel in 24 years this month, as bets that President-elect Joe Biden would increase assistance packages to help stem the economic damage caused by the coronavirus pandemic grew, flooding the market with dollars and diluting their influence.

The weakening of the dollar has benefited Israeli consumers and importers, but it is hurting local producers that rely on exports and other companies who receive payments in dollars. The Bank of Israel made a drastic move on Thursday, declaring that it plans to buy over $30 billion in foreign currency in 2021, with $1 equivalent to NIS 3.116. Any producers, though, are dubious that the change would be sufficient to get them out of the quagmire. The Bank of Israel’s announcement, which Deputy Governor Andrew Abir described as an extraordinary move, for unusual times, was made in the hopes of holding the shekel under control and stabilizing the exchange rate, as well as preventing multinationals from fleeing.

The shekel fell to NIS 3.19 to the dollar on Thursday after the launch, and by the weekend was trading at NIS 3.27 to the dollar, a 5% drop against the greenback, indicating investor confidence in the change. Following the central bank’s decision on Thursday, economists at Bank Hapoalim Ltd. predicted that the shekel will begin to weaken in the coming weeks. Israel is not a stranger to buying dollars in order to undermine the shekel. The bank has been buying billions of dollars a year since 2008, as part of a campaign that began after the global financial crisis. It purchased a whopping $20 billion worth of dollars in the foreign exchange market in 2020, but the dollar fell 7.5 percent against the shekel over the same period.

The shekel’s strength stems from the country’s civil unrest, a national budget kept hostage by political maneuvering, and the coronavirus pandemic, which has triggered one of Israel’s worst economic crises in history. Prime Minister Benjamin Netanyahu is facing three corruption charges, and the nation will hold its fourth general election in two years in March, headed by a dysfunctional governing coalition that has struggled to pass budgets for 2020 and 2021. The budget deficit for 2020 was the largest in the country’s history, at NIS 160.3 billion ($50.4 billion), or 11.7 percent of GDP, more than three times the deficit from the previous year. According to a Bank of Israel survey, the coronavirus pandemic has resulted in record levels of unemployment in Israel — 16 percent this year. A strong shekel, which hurts exports, could stymie the economy’s ability to rebound from the virus’s blast.

Foreign share markets are booming, leading the shekel to strengthen against other currencies as investors sell foreign currency reserves to hedge their foreign stock market portfolios. This is why it is important to make sure that before starting the investing or trading process to have a thorough analysis on how to measure strength of a currency, that informs the trader which currency is doing well and which is not at any given time and special software programs are very helpful in this case. The shekel is also supported by the Israeli economy’s solid fundamentals. Since its exports outweigh imports, the country has a substantial current account surplus, owing to its robust high-tech sector, which is seeing fast revenue growth and drawing large volumes of foreign investment. Natural gas output from vast gas fields has also helped to reduce energy imports since 2013, and household investments in savings and pension schemes in Israel are high. All of which has a positive effect on the country’s current account, resulting in a surplus.

A survival mode

A healthy shekel benefits Israeli consumers because it lowers the cost of imported goods and international travel. This would be useful as the country recovers from the coronavirus outbreak.

However, the increase in the currency is bad news for local producers and exporters, who pay their employees, wages, and other bills in shekels but market their goods in dollars. Firms have been pressured to lift premiums, making them less competitive in the world economy, or reduce profit margins or a hybrid of the two. Companies are coping by slashing costs, laying off jobs, or relocating to more cost-effective areas.

Mer Group has branches around the world that specialize in everything from telecommunication networks to homeland security and smart cities solutions, defense systems, and cybersecurity services. It began as a family business in the 1980s and has since grown to become a publicly traded firm with a market capitalization of NIS 42.2 million ($13.4 million). The company has shut down two antenna-tower production plants in Israel and is now making them in joint ventures with Chinese, Turkish, and Mexican partners in China, Turkey, and Mexico.

According to Netanel Haiman, the president of the Manufacturers Association of Israel’s economics branch, just as the government devised a series of programs to defend the economy from the pandemic, it now has to devise a “vaccine for the economy” against the high shekel.

Economists say that it is a mixed bag. When considering the shekel’s growth, policymakers must consider a variety of factors. On the one hand, a powerful shekel would benefit pandemic-affected consumers by allowing them to spend more on cheaper manufactured goods. On the other hand, it is terrible for producers that depend on exports and have much of their production plants in Israel.

Summing It Up

The Bank of Israel’s activities in the foreign exchange market is beneficial, but it should be doing a lot more. Currency variations are difficult to manage. Other than seeking to regulate the shekel, the government should be assisting companies in other areas, such as cutting taxation and relaxing oversight. Israel’s economy is diverse and technologically sophisticated. The agriculture sector employs about 1% of the working population and contributes marginally more than 1% of GDP (World Bank, 2019). Fruits and vegetables, cereals, wine, and cattle raising are the country’s primary crops. With the exception of cereals, the country is self-sufficient in terms of food production. This is why there is a much more positive forecast than in the case of other developing countries.

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