Local economy now more resilient to exchange rate changes

Leading paper attributes improvement over the last 10 years to lowering high-level business's exposure to depreciation.

shekel coins 88  (photo credit: )
shekel coins 88
(photo credit: )
Israel's economy has become more resilient to exceptional changes in the exchange rate, according to a new study published by the Bank of Israel. "The analysis shows that despite the heavy exposure of the economy as a whole and most sectors within it to appreciation of the shekel at the end of 2005, the economy was quite resilient to an appreciation, because it caused little direct or indirect damage to the private sector and the banks," said the research paper. "The results show that changes in exposure of Israel's economy to exchange rate risk over the last 10 years, together with the improved financial robustness of the different sectors, made the economy more resilient to exceptional changes in the exchange rate in 2005 than it was in 1997." It attributed the improvement over the past 10 years mainly to the lowering of the business sector's high level of exposure to depreciation and its greater financial strength together with higher capital adequacy in the banking system, which made the latter more resilient. As such, a significant share of the exposure in 2005 was focused on households, on whom the impact of an exceptional appreciation was less marked relative to the economy as a whole, as was its impact on the banks. "The central, but not exclusive, role played by the banks' resilience in the economy's financial stability favors the continuation of the process of reducing the banks' dominance in financing the business sector, so that their indirect exposure to financial risks will fall," the research paper concluded. The report indicated, however, that the economy had not achieved immunity, and that according to data from the end of 2005, some sectors may suffer a considerable negative impact at times of exceptional depreciation or appreciation, although the economy overall may remain unaffected. Compiling the research study, the central bank for the first time used the so-called balance sheet approach (BSA) framework, which is gaining prominence worldwide in the surveillance of financial stability to analyze an economy's resilience to exchange rate risk. The framework is applied to Israel's economy, by using a combination of new national balance sheet data and foreign currency balance sheet data.