With the nomination of Karnit Flug to replace Stanley Fischer as Bank of Israel governor, all eyes are back on the central bank to see in which direction she will take the country’s monetary policy. The task is complex, and must take into account effects on inflation, the foreign exchange rate, demand for real estate and the overall macroeconomic situation.

Bank Hapoalim’s Economics Department manager Victor Bahar offers The Jerusalem Post 10 facts on Israel’s currency, the New Israeli Shekel, to put it all in perspective.

The shekel has been one of the world’s strongest currencies in recent years Relative to many advanced economies, Israel weathered the 2008 financial crisis relatively well. It’s strengthened considerably since, with the exchange rate against the dollar dropping from about NIS 4.2 before the crisis to NIS 3.5 Wednesday.

The hi-tech industry is the main ‘supplier’ of foreign currency inflow Hi-tech accounted for $20 billion of good exports out of $44b. total in 2012.

But the contribution to currency flows is much higher than that because of “exits.” This year, foreign companies forked out over $5b. to buy up Israeli startups, which is sometimes classified as exports of services and sometimes as Foreign Direct Investment.

Other than goods, hi-tech services like information security and programming are also exported.

A currency with a low volatility, even in times of security tension The shekel’s “implied volatility,” a measure of how much a currency fluctuates, is 7.0 percent compared to 7.4% of the euro against the dollar and 9.8% against the Turkish lira.

The natural gas found in the sea has a major role in the strengthening of the currency. Israel might become a gas exporter in the future.

The discovery of natural gas in the Tamar and Leviathan fields off the coast, with over 750 billion cu.m. of gas between them, was a game changer for the country’s energy sector.

Instead of depending on energy from abroad, often from politically unstable places like Egypt, Israel can supply itself and even sell gas abroad.

Selling natural gas on the world market, however, has implications for the whole economy through the currency markets. The sales brings dollars into the economy, making them cheap relative to the shekel.

The government decided to establish a ‘wealth fund,’ which will invest part of the income from gas abroad In April, after natural gas started flowing from Tamar, the government approved the creation of a sovereign wealth fund, expected to open in 2016-2017. The fund is a means of avoiding what economists call “Dutch disease,” in which the strong currency from a natural resource find ends up hurting the export sector, and actually weakening the “real” economy.

Stashing a portion of the gas profits in a sovereign wealth fund, which would invest the dollars abroad, ensures that the natural gas does not end up inadvertently hurting the economy’s trade sector.

Israelis have a strong ‘home bias’ and they prefer to hedge the exposure of exchange rate in their overseas investments For example, when Israelis want to get exposure to the US stock market they often prefer to buy local Exchange Traded Funds, which neutralized the exchange rate exposure.

That gives them US stock performance in shekels terms.

Although it’s a fully floating exchange-rate regime, the central bank intervenes, from time to time, in the FX (foreign exchange) market to avoid sharp appreciation The BoI started to intervene in the market in March 2008. As it has intervened in the foreign exchange market, Israel has grown its reserves from about $29b. to $79.9b. at the end of September, mostly from the interventions. The reserves give it a good buffer should it need it during future financial turmoil.

Israel has a surplus in the balance of payments current account A surplus in the BOP current account usually means you don’t accumulate debt to other countries, and you don’t have financial needs, which might put pressure on your currency in stressful times.

The exchange rate is an important consideration in monetary policy To battle the strengthening shekel, the Bank of Israel has not only intervened directly in the foreign exchange markets, but also lowered the interest rate from a high of 3.25% in September, 2011 to the current 1%.

Israel is a net lender to the world – FX assets are higher than liabilities.

Israel is net exporter, or to be more accurate, it has a current account surplus. It gets more foreign currency from exports than what it need for imports and invest the surplus abroad, in foreign countries’ debt, for instance.

This article was produced in conjunction with Bank Hapoalim.

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