Declining dollar taking its toll

As strong shekel squeezes earnings, manufacturers threaten to leave country.

dollar 88 (photo credit: )
dollar 88
(photo credit: )
As the country's currency charged through the four shekel to the dollar barrier this week, evidence of the effects of the weak greenback was emerging across Israel's business community. "Should the dollar not strengthen within the next two months, I will be forced to move my entire operation to China, where it is less expensive to produce my products," Nehemia Margolin, CEO of Anastasia, a textile manufacturer based in Tel Aviv, said Wednesday. Anastasia exports 95 percent of its products to the US, however Margolin pointed out that in order to hold on to his US customers, he needs to keep his prices low, something that has become increasingly difficult as the dollar has continued its dramatic freefall, decreasing approximately 15% against the shekel over the last year. "If the shekel is stronger, like it currently is, it means the Israeli economy, heavily reliant upon the amount of exports and imports, cannot be as competitive in the global marketplace," Avia Spivak, professor of Economics at Ben-Gurion University, recently told The Jerusalem Post. Many believe this problem can be moderated by ceasing the pricing of goods, such as real estate, in dollars. "[With the shekel breaking through 4] it is time for us to seriously start talking about separating our ties to the dollar. We need to begin thinking more in terms of shekels and less in terms of dollars," said Uriel Lynn, president of the Federation of Israeli Chambers of Commerce. Lynn noted that countries across Europe, including England, France and Germany have started reducing the ties they have to the dollar, and Israel, with its strong shekel, should follow their leads. "By holding so tightly to the dollar, we are only hurting our economy," he added. Bank of Israel Governor Stanley Fischer is also an advocate of such a move, having indicated that the central bank was considering abolishing the dollar-shekel representative rate it sets daily because it encourages the pricing of goods in dollar. In an attempt to curb the shekel's advance, Fischer has cut interest rates by 1.75 percentage points over the past six months to 3.75 percent, but the moves have been unsuccessful. Fischer's objective in slashing interest rates is to force people to reconsider their shekel-portfolios once they realize that the shekel has less to offer, as well as to try to raise the inflation rates in Israel to a target rate of 1% to 3%, which he believes to be the optimum level to promote economic growth. Last year the Central Bank considerably missed this number, when inflation ran at minus 0.1%. Maoz Chen, CEO of Africa-Israel's mutual funds department, said it is hard to predict how long the current trend will continue and in which direction the shekel will head next. "In the short-term, it could reach NIS 3.8 to the dollar, however in the long run, it ultimately depends on inflation rates. If rates continue to remain lower here than in the US, the shekel will continue to strengthen against the dollar," he said. Exporters, who have already lost a combined $1 billion this year, hope the dollar reverses its current trend as they will lose more than $3b. in sales over 2007 if the dollar remains as it is, according to Pinhas Kimmelman, chairman of the forum of industrial financial managers in the Manufacturers Association of Israel. "The cause of the losses stems from the gap between what the dollar was expected to be at when orders are payed for and what the rate actually is," he said. Moreover, while 2006 saw a 6% jump in the number of companies who exported more than $100m. worth of products, more gains weren't likely this year as the weak dollar essentially eliminates the potential for growth among the country's largest exporters, noted Danny Laish, spokesman for the Manufacturers Association. More pronounced, however, is the affect the weak dollar is having on smaller export companies. Shimon Shekel, CEO of MultiLock, a company that manufacturers locking systems, noted that his company has lost more than NIS 5m. over the last six months and it is the first time in the company's history that he has had to raise prices on his products, a move, he says, has contributed to the company's drop in profits. Similarly, Teva-Naot's CEO Michael Eiluz said that because the company has signed binding contracts with the countries to which it exports, it is unable to change the prices on its products and has, therefore, had to absorb losses of millions of shekels. Even companies that were established prior to the State of Israel are feeling the affects of the current situation. "Our problem is that customers around the world are not willing to pay higher prices for our products," said CEO of the stone exporter Jerusalem Marble, Arik Grebleski. "In order to cut costs and turn a profit, we are going to be forced to downsize," he added. Corporate earnings at publicly held companies were also beinq squeezed by the currency. Rami Rosen, a market analyst at Oscar Gruss & Co said that while no publicly traded companies were going to be devastated by the current situation, any company that needs to pay its expenses in shekels, while its revenue is in dollars, such as Orbotech, ECI Telecom and DSP Group will be hurt the most. Indeed, in their latest quarterly reports these companies indicated that their earnings were impacted by the currency. Although the situation is more severe than in the past, Rosen said, however, it would by no means "kill" the companies.