Every time that the dollar makes headlines, for some reason a picture of Governor of the Bank of Israel Prof. Stanley Fischer is attached. Fischer has taken a lot of criticism for his policy of buying dollars. Who didn’t criticize him - the Ministry of Finance, OECD, and top economists. It's hard to forget the piercing criticism published in "Globes" by hedge fund advisor Avi Tiomkin, who called Fischer "the worst governor in Israel's history".
The Bank of Israel has made many mistakes along the way. It helped inflate the real estate bubble, and managed the currency war somewhat clumsily, but it now appears that the last of critics has fallen silent. The Bank of Israel's foreign currency reserves have saved Israel from economic catastrophe. The Bank of Israel is holding the reserves very close to its chest, and in times like these, they warm the heart, and Fischer does not appear to be ready to release them anytime soon.
We are hearing much less prattle from Prime Minister Benjamin Netanyahu and Minister of Finance Yuval Steinitz about the government's growth and unemployment achievements. After the big bluff of the unemployment figures blew up in their faces, and with the growth rate falling, it is now clear to everyone that Israel is not much different from other countries. Add to this the headaches from Egypt, Syria, and, of course, Iran, and the headaches from the social protest, which has gained strength, you will understand why foreign investors no longer see Israel as a paradise.
In view of all this, it is now quite clear that the weakening of the shekel against the dollar, which has amounted to 18% over the past 12 months, prevented a real catastrophe, because data show that every 10% of depreciation contributes at least 1% of GDP growth. A year ago, the shekel-dollar exchange rate was NIS 3.40/$. It is not hard to see what Israel's growth rate would be were it not for the shekel's depreciation - almost zero.
There will be people who will say that this is due to the strengthening of the dollar against global currencies, or to Israel's geopolitical circumstances, which is all true. But there is now no doubt that Fischer's actions - the interest rate cuts, dollar purchases, and the raising of the ceiling on the purchases this year together with restrictions imposed by the Ministry of Finance - have yielded results.
The shekel's depreciation has helped many exporters, and at least partly covered the damage they've suffered from the eurozone crisis.
The $4 million question is, when will be Bank of Israel release its reserves? The answer, it seems, is quite clear. Not anytime soon. Inflation is negligible, and on this point the timing of the shekel's depreciation was perfect. Depreciation normally hikes inflation, but in these times, when the social protest is again gathering strength, and there are more and more calls for calling early elections, it would be hard to see price hikes, despite threats by manufacturers and importers.
Meanwhile, the departure of foreign investors is orderly, without panic and a sharp depreciation that happened in Brazil and Mexico. The Bank of Israel likes this very much. Under currently prevailing conditions - a current account deficit, growing foreign investment by Israelis, and the steady strengthening of the dollar in the world - the shekel-dollar exchange rate will continue to rise at least to the desirable equilibrium of NIS 4.20/$, a level that the Bank of Israel hinted at back in 2009.
if Fischer continues to act wisely, he will wait for a further depreciation of the shekel before releasing part of the reserves, because there is no win by knock-out in the currency war. This is a war of attrition, and as long as financial institutions continue to do whatever they like without their freedom of action being restricted, the Bank of Israel should continue laying by for a rainy day.
Yossi Frank is a financial adviser and CEO of Energy Finance Ltd.
Published by Globes [online], Israel business news - www.globes-online.com - on July 23, 2012
© Copyright of Globes Publisher Itonut (1983) Ltd. 2012