By ZIV HELLMANshekel versus dollar 521(photo credit: REUTERS)
The shekel is under pressure again – appreciation pressure, that is.The recent fall of the shekel to dollar exchange rate to under 3.50 - at one point dipping below 3.40 – has raised several observers’ eyebrows. The shekel to euro rate also dropped, closing in on 5.00. A few years ago, the rate was about 4.80, so it is clear that the exchange rate has eroded significantly and steadily for some time. At one point, exporters expressed concerns that a rate below 4.00 would be significantly harmful for exports.Although a stronger shekel means less expensive imports for the average Israeli and more affordable holidays abroad, other sectors of the economy are concerned. Israeli institutions whose budget expenditures depend to a significant degree on money coming from abroad, including many non-governmental organizations, some educational institutions and political activist groups, suffer a direct loss of purchasing power every time the shekel appreciates. And exporters dislike the erosion of the international export competitiveness that accompanies a strong shekel because it means that their products automatically become more expensive in foreign markets.Pressure from industrialists is one reason that the Bank of Israel has for several years been making great efforts to weaken the shekel as much as possible, mainly by conducting daily purchases of foreign currency amounting to billions of dollars per day.There is only so much, however, that the central bank can do to fight long-term and international trends that, if they continue, will cause the shekel to keep getting stronger. As far back as February 2010, the governor of the Bank of Israel, Stanley Fischer, stated in an address on a visit to Australia that the bank cannot intervene in the foreign exchange market forever because the amount of reserves it can sell is limited. Capital flow regulations pose another option that policy makers can adopt, but in this regard Fischer stated, “It is [incumbent] upon policy makers to make every effort to refrain from implementing such measures” – although he did then add that “for central bankers it is never worthwhile to say never”.When the ammunition that the Bank of Israel can keep firing in this battle starts to run out, Israelis may have no choice but to adjust to the shekel as a relatively strong international currency.The trend lines have been clear for a long time. The real effective rate of the shekel, as measured against a basket of currencies and taking into account inflation differences between Israel and its trading partners, has been registering an overall shekel appreciation since at least 2007.To some extent, international developments are behind this.Developing countries in Asia and South America are in the midst of an unprecedented economic growth spurt relative to the sluggish West. A trade imbalance has developed over at least the past 15 years between the United States on one hand and Asian nations on the other, and that has meant there are long pent-up pressures that analysts foresee can only be resolved by a depreciation of the dollar.This in turn means that many corporations and smart investors in the West are looking for economies around the world in which to put their money. And one of those economies is Israel.The more productive the Israeli economy looks relative to most of the industrialized countries, the more it attracts foreign capital – which then translates into appreciation pressure on the shekel. The Israeli economy has humming along very nicely indeed over the past year, registering overall GDP growth of 4.5% in 2010, with eye-popping 7.8% annualized growth in the fourth quarter of that year. When Israel achieves the status of energy exporter, which is expected to happen mid-decade as off-shore natural gas fields begin yielding their bounty, there will be little that can be done to keep the shekel from taking off on a strong appreciation slope.Since exports account for a 45% of total GDP, there is good cause for concern about any rapid hit to international competitiveness caused by changes in currency rates – especially if some industries come to the conclusion that the only way to maintain global competitiveness is by eroding local salaries. But a closer look at the situation, as conducted by a Bank of Israel study in 2008, shows that the effects are not homogeneous across the economy.Changes in the real exchange rate, it seems, have no clear impact on exports from industry sectors that are high-tech intensive.The sectors that are negatively impacted are characterized by low levels of technology, such as textile exporters.The conclusion from this analysis, then, is no different from the one arrived at many times in many different ways: the only way to preserve and increase international competitiveness in the long run is by investment in training and infrastructure to ensure that the products sold in export markets have such value added to the end buyers that they will be attractive no matter what future exchange rate fluctuations bring.
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