Fischer intervenes in shekel rise

First-quarter deficit almost triples to NIS 4.6 billion over previous year; BOI buys dollar reserves.

April 8, 2013 23:06
3 minute read.
shekel and dollar exchange

shekel versus dollar 370. (photo credit: REUTERS)


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The Bank of Israel on Monday bought dollar reserves to combat a stubbornly strengthening shekel for the first time since July 2011, taking some $100 million out of the market.

A strong shekel, which dipped below 3.60 to the dollar on Monday, can weaken Israeli export market by making goods relatively more expensive to foreign buyers.

The rate against the dollar alone probably would not lead to an intervention were the dollar also weakening against most global currencies. But the opposite was true in March, while the shekel was strengthening against a basket of currencies.

According to the Bank of Israel, the shekel rose 4.4 percent against currencies of Israel’s main trading partners over the past year, including 2.8% in March.

The move may have been more symbolic than anything, FXCM CEO Tal Zohar said. The central bank was trying to remind speculators that it was willing to intervene in the market if necessary, he said.

“This first interference was a signal to the market, saying to the speculators: ‘Be careful, beware, we are still here,’” Zohar said. “One hundred million dollars sounds like a lot to the average person, but in the capital markets it’s nothing, it’s a drop in the sea.”

One of the factors pushing up the currency has been new gas from the Tamar offshore field flowing into Israel. Dollars are expected to flow in to buy the gas, making them cheaper to buy for shekel holders. Bank of Israel Governor Stanley Fischer, in his annual report last week, urged Israel to create a sovereign-wealth fund to mitigate the effect of natural gas on the shekel.

“Currently the gas in Tamar does not create a cash flow in the currency market, but the fact that Israel has this energy source for the next 20 years does create more trust in the Israeli economy,” Zohar said.

The other factor keeping the shekel strong, he said, is the strong signal from Finance Minister Yair Lapid that he is serious about the deficit.

Israel’s budget deficit for the first quarter of 2013 was nearly triple that of the same period a year earlier, NIS 4.6 billion, compared with NIS 1.6b., according to data released Monday by the Finance Ministry.

The numbers do not bode well for the state’s finances, as 2012 ended with a deficit of 4.2% of GDP, well above the 3% target. In its annual report issued earlier in the month, the Bank of Israel predicted that this year’s deficit would also miss the target and would be 3.6% of GDP.

Even if it fails to hit the deficit target, the government must, by law, trim NIS 13b.

from spending promised for the 2013 budget. On Sunday, Lapid decided to do away with the two-year budget, primarily because deficit projections for that period of time tended to be inaccurate. However, since the state is only expected to pass the budget about halfway through the year, it will still present the 2013 and 2014 budgets together this year. In the meantime, the government will continue operating on a month-to-month version of the 2012 budget.

According to the Finance Ministry, the deficit for March was NIS 2.9b. About a third of the spending for the month was devoted to paying interest, while the remainder went to government offices. A Finance Ministry analysis found that the greatest cost increases were in civilian offices, in which salaries and transfer payments rose 10.2% compared with the same period last year.

Tax revenues were slightly lower than in the first quarter of last year. One of the reasons for low tax revenues was a high level of refunds, which grew at a rate of 48% to NIS 1.5b.

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