It has been a long time since one topic has so dominated conversations between Israeli businessmen – and, for that matter, the bankers, accountants, and other professionals who help them conduct their business affairs. That topic is the strength of the shekel, the value of which has climbed steadily higher and this week reached levels around NIS3.46 to the dollar. (Remember that the lower the number — say 3.45 vs 3.50 – the higher the value of the shekel.)
The topic is well-known to many Jerusalem Post readers, whether they are tourists who find Israeli prices to be extremely high when they visit, or long-term visitors (who may be legally tourists, but in fact are not, either behaviorally or psychologically), or permanent residents who live off income from overseas.
But there is a fundamental difference between the cries of pain from industrialists, especially exporters, and the bleating of tourists or moanings of olim. The former will generate a policy response from economic decision-makers, whilst the latter will – at most – generate sympathy. The difference has a simple, if brutal, explanation: the damage inflicted on the business sector by the shekel’s strength represents an existential threat to the Israeli economy. Not so the discomfort, however, intense, of small groups within the population – especially since other groups benefit from a strong shekel.
The damage to business competitiveness, especially of medium-tech, low-tech and no-tech exports which generally have much smaller profit margins than high-tech firms, is not just a function of the actual exchange rate. Another, no less important, factor is how long the strength of the shekel persists. The cumulative damage increases with time, because managers and owners adjust their expectations in line with the recent trend and assume it will continue. That is a well-known behavioral tendency – the technical term is ‘recency bias’ – and it explains why the media are currently full of predictions that we will soon see a wave of firings across the Israeli business sector.
Unfortunately, these predictions are potentially correct, not just because of an assumption that the recent trend will continue – in which case the outlook for profits and even sales is bleak — but because the underlying trend actually stretches back a long way, so that considerable real damage has already accumulated.
Precisely because so much is at stake — jobs, as well as the survival of the companies themselves or, at the least, whether they remain in Israel – the issue has become existential. Nor is this news: almost six years ago, in March 2008, when the US dollar was plumbing record lows around the world and the shekel reached NIS3.25 to the dollar, former Bank of Israel Governor Stanley Fischer realised that the doctrines he had helped formulate and propagate both as an academic and as a senior IMF official, were invalid given the reality he was facing in Israel. He therefore ditched the doctrine of non-intervention in the foreign exchange markets by central banks and began a process which eventually saw the Bank of Israel systematically intervene and buy tens of billions of dollars over several years, in an effort to prevent the shekel rising too much.
Israel has not been alone in facing this problem of an overvalued currency. Switzerland suffered a far worse case and, in one of the most dramatic and genuinely amazing policy moves of recent years, the Swiss National Bank announced in August 2011 that it was devaluing its hyper-strong currency and fixing a floor rate of SF1.2 to the euro. It would – and did – buy any amount of euros offered at that price, effectively sacrificing the legendary strength of the Swiss franc in order to save Swiss industry from being driven out of business.
In speeches before and after he left the Bank of Israel, Fischer espoused the Swiss approach, giving it his ‘hechsher’ as the correct and necessary response of a small, export-oriented country to the distortions of the global markets being caused by the monetary policies of the Federal Reserve, the ECB and the Bank of Japan. Perhaps the most important of these speeches was delivered in Prague last February – and, lo and behold, the Czech central bank stunned the markets a few weeks ago by emulating the Swiss policy moves. It devalued the koruna by 7% and fixed a rate of 27 koruna to the euro, at which it will buy any amount offered.
This is a radical, almost desperate, approach. But desperate times require desperate measures and Israel will have to be much more aggressive in its response if it is to stop the creeping revaluation of the shekel, which threatens to inflict massive and largely irreversible damage to the country’s critical export industries. There are other possible options, some of which – like removing the tax exemption on foreign investments in Israeli government bonds – are probably insufficient to do the job, while others – such as capital controls or a two-tier exchange rate for exporters and importers, are too far-reaching and/or in breach of treaty commitments.
What is certain is that, barring a sharp rise in the dollar on global markets or a serious deterioration in Israel’s security position, a major move will have to be made, and soon.