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.
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
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.
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
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
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
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
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
That gives them US stock performance in shekels
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.