Covid-induced value of Israeli shekel could pave the way for a stronger economy

The year of 2020 is like no other in remembered history. The entire world was attacked by an invisible deadly virus with no respect for money, power, race, or borders.  Kristalina Georgieva, managing director of the IMF, said recently, “Never in the history of the IMF have we witnessed the world economy come to a standstill,” with the pandemic creating an economic crisis “like no other.”

Israel, like the rest of the world, has suffered at the hands of the pandemic, reporting at least 350,000 positive cases of Covid-19 and at least 2,950 deaths. With two national lockdowns already, to control rising infection, and a possible third lockdown in days to come, the Israeli economy, at best, is forecast to contract by only 4.5% this year., At its worst, the economy could shrink by 9%, according to central bank Governor Amir Yaron. For instance, weekend closures of shops and beaches are estimated to cost the economy around $233 million.

Yet, despite a bleak and stagnating economic environment, the Israeli shekel recently achieved its strongest rise since July 2008, when the shekel-dollar rate descended below the psychological threshold of 3.40 Israeli shekel to the U.S. dollar on September 1, 2020.

Victor Bahar, chief economist of one of Israel’s largest banks, Bank Hapoalim, anticipates this trend of a strengthening shekel to continue.  It seems incredible, however, that the shekel could strengthen continuously against the dollar, in the face of a deadly pandemic, a resulting economic and financial depression, and persistent political instability.

However, as Bahar explains, the strength of the shekel against the dollar is due to reasons other than a strong Israeli economy or strong currency.

For instance, as a habit, Israelis travel overseas in the third quarter of the year, and are known to spend an equivalent of $3 billion abroad. But, in 2020, this has not happened. Says Bahar, “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.”

Furthermore, when Israelis spend money overseas, they engage in currency trading, buying dollars or other foreign currencies in exchange for shekels, which directly impacts Israel’s balance of payments, as money spent abroad is considered imports.

Another reason for spending less on imports like cars, air conditioners and other luxury goods, is the recession brought on by the pandemic, with unemployment and shrinking incomes. Israel’s GDP in the second quarter reduced by 28.7% annually, leading to a fall in demand for imports, and consequently, a reduction in demand for foreign currency.

The recent boom in foreign stock markets has also strengthened the shekel.  When stock markets plunged in March and April 2020, the shekel reached 3.90 to the U.S. dollar. However, recently, the U.S. stock market soared beyond Israel’s stock market, raising the shekel rate against the U.S. dollar.

According to Kobby Levi, heading markets strategy in an Israeli bank, the rise of the shekel against the dollar is mostly due to “the weakness of the dollar in the world.” Even the huge quantities of U.S. dollars acquired by the Bank of Israel since 2008, to control the shekel, could not curb its rise.

This led to a situation where the shekel reached record highs, ranking it among the world’s strongest currencies.

Financial experts analyze that the shekel is also bolstered by “the strong fundamentals of the Israeli economy.” For instance, Bahar ties the continued strength of the shekel to the country’s surplus in the balance of payments current account, making the surplus “…not transitory, it is structural, at the basis of our economy. That won’t change so fast.”

However, even as a strong shekel is a plus for Israeli consumers who can purchase luxury items relatively cheaper, and travel overseas more cheaply, it is detrimental to exporters. Thus, the Bank of Israel was compelled to intervene in the market, encouraging a review on trading fundamentals through a currency trading course to ensure that export industries struggling with an unfavorable exchange rate “won’t be wiped out” because of escalating manufacturing costs.

Ron Tomer, President of the Manufacturers Association of Israel, said, “Israeli exporters are coping with two diseases at the same time – the coronavirus and the fall of the dollar.”

Also focusing on exporters, Bank of Israel Deputy Governor Andrew Abir, said, “The real economy is in a situation where a further appreciation of the shekel would not be helpful.”

Netanel Haiman, the association’s head of the Economics Division, said, “We are feeling like a forceps effect.” Indeed, the declining global demand due to the Covid-induced recession is an added complication for companies rendered noncompetitive by a strong shekel. Haiman said, “This might push people to set up their manufacturing facilities abroad.”

Gad Lior, senior analyst at Ynet, a major Israeli news website, said, “Such a low rate of the dollar could lead to the cessation of exports of certain products due to lack of viability and may result in employee layoffs in the exporting factories.”

A group of industrialists wrote to the Israeli Finance Minister, recently, saying, “The plunge of the dollar is deepening the crisis and hurting even more the chances of the Israeli exporters to survive.”

Even as the shekel is seen to retain its strength in the foreseeable future, Alex Zabezhinsky, chief economist of an investment company, said, ““Israel’s financial risk rose due to the deteriorating economic situation and the way that the crisis is being managed, increasing the chances the shekel will stop being attractive to foreign investors.”

 As Deputy Governor of the central bank, Abir, said, “In general there seems to be a dislocation between financial markets and the real economy in many areas. The shekel is also part of that.”

Bush-era White House Press Secretary, Ari Fleischer, once said, “We believe in the fundamental strength of Israel’s economy and have confidence in its long-term potential.”

As good economic sense prevails, supporting manufacturers and exporters could become the strategy for Israel to recover from the coronavirus-induced crisis. As writer Anthony Robbins said, “Every problem is a gift.”

About the Author
Scientist turned techie. Founder at Neliti & Reputio. Interested in sharing lessons learnt from Tel Aviv's bustling technology ecosystem.
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