Dollar-purchase program won't last forever, exporters beware - Fischer

Foreign-currency reserves reach $52 billion, but 'there is a cost.'

Stanley Fischer nice 248.88 (photo credit: Ariel Jerozolimski)
Stanley Fischer nice 248.88
(photo credit: Ariel Jerozolimski)
The central bank cannot beat the market and will not continue to buy foreign currency forever, Bank of Israel Governor Stanley Fischer said Wednesday. "Exports are fundamental to the development of the local economy," he said at a session of the Knesset Finance Committee. "But we all know that in the long term, central banks are not able to beat the market. During the recession we had an impact on the exchange rate, and as result our recession was shorter than the global one." Fischer said exporters needed to adapt to a reality in which the central bank cannot prevent market forces from affecting the foreign-exchange rate. On Monday, the Bank of Israel announced that it would "act in the foreign-exchange market in the event of unusual movements in the exchange rate that are inconsistent with underlying economic conditions, or when conditions in the foreign-exchange market are disorderly." After the announcement, increased dollar purchases boosted the dollar-shekel exchange rate by more than 5% to a representative rate of NIS 3.88 on Wednesday. Since the central bank started to buy foreign currency in March 2008 to help stem the dollar slide, foreign-currency reserves have been pumped up to $52 billion at the end of July, up from $32b. in July last year. "There is a cost to holding reserves, but there is also an advantage and a gain," Fischer said. "A country with large reserves is more secure to weather economic shake-ups around the world. In this crisis, countries with larger reserves like Brazil and Korea managed to cope with their problems better than countries with lower reserves." According to Daniel Tenengauzer, an analyst at Bank of America-Merrill Lynch, instead of weakening the greenback against the shekel, the central bank's dollar-purchase program has supported the shekel. "Ironically, the dollar-purchasing program initiated by the central bank has contributed to strengthening the country's macro fundamentals, through an improvement of the foreign-currency reserves position," he said in a report Wednesday. "We are now bullish on the shekel, as we think that Israel is well-positioned to exit the crisis on a strong footing." Tenengauzer said despite a sharp drop in export performance, the economy has proved relatively resilient, and there were signs that the macro outlook has improved. He forecast the dollar-shekel exchange rate to weaken to 3.55 by year-end and continue depreciating in the first half of next year. "As an illustration of that, the Bank of Israel recently announced that it would stop buying government bonds," Tenengauzer wrote. "The next step should be an interruption of the foreign-exchange-reserves accumulation program, which will ultimately provide some support to the shekel. "Our key risk to our bullish call is the adverse fiscal dynamics that may weigh on investor sentiment and credit ratings down the road."