Bank’s Buy Notice Noses Shekel Down, But For How Long?

Amir Yaron, Governor of the Bank of Israel (Flash90)

The announcement by the Bank of Israel that it plans to buy $30 billion during 2021 has already had an effect on the shekel, which lost some ground against the dollar.

The announcement was made last Thursday, and the representative shekel-dollar rate was set at NIS 3.2310/$ on Friday, 3.69% higher than the previous day’s rate. As of late Sunday it was up to NIS 3.2695/$, Globes reported. The Israeli currency has depreciated by a similar percentage against all the world’s major currencies.

Explaining its move, the BoI said on Thursday: “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, and thus support the economy’s continued dealing with the economic ramifications of the Covid-19 crisis.”

Globes praised the bank’s decision: “Whoever thought of the idea of announcing the foreign exchange purchases in advance is a genius – but a PR genius rather than a macroeconomic one. Normally the Bank of Israel has to actually buy dollars in order to impact the exchange rate. In a stroke, and without buying a single dollar, the Bank of Israel was able to wipe nearly 5% off the value of the Israeli currency.”

However, “it remains to be seen over the next few days whether the effect will fade and the shekel will immediately rebound. To put matters into perspective the shekel has been pushed back to its exchange rate on the dollar in the first week of December, when it was on the verge of moving from its strongest in 12 years to its strongest in 24 years.”

Meanwhile, Israel’s exporters continue to struggle to survive in the strong shekel environment.

Marian Cohen, the chairman of Israel’s Mer Group, who has overcome many crises in his 36 years at the tech holding firm, described the current situation “as an existential crisis.”

A strong shekel is good for Israeli consumers — it makes imported products and travel abroad cheaper. But the rise of the currency is disastrous 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 evaporated, or both. Companies are responding by cutting back on expenses, laying off workers or relocating to cheaper locations.

“Businesses are being murdered,” Mer’s Cohen told The Times of Israel.

BoI Deputy Governor Andrew Abir acknowledged the crisis. “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.”

But the strength of the shekel is a function of the strength of the Israeli economy: 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 massive gas fields since 2013 has enabled reduction of 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 dollar is becoming weaker and weaker, and our position versus competitors is getting weaker too,” Cohen 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.

Dovi Frumovich, CEO of Romold Technologies CEO, a manufacuter of plastics products for industry, currently exports some 25% of its products. “A few years ago, our exports accounted for 70%-80% of our sales,” said Frumovich. “It has become very expensive to produce here, so we have moved production to Germany and the Czech Republic.”

“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.”

Romold has trimmed its workforce too. “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.”