One of the most common mistakes made by investors is their inability to anticipate structural changes before they occur. The assumption that what has been is what will be causes many investors and analysts to commit fundamental errors. Such an example is that some of the ratings agencies have ignored the changes taking place in the Israeli economy. Most recently S&P reaffirmed Israel's high rating. This an example of an assessment without any foundation, based on the broad political consensus in Israel on the need to restrain public debt.
I would suggest that they look at the swearing in ceremony for Israel's new government and do the multiples.
In the Israeli foreign exchange market, the shekel has been strengthening and is nearing its all-time record peak value levels. Everybody understands that it is easy to play on the Israeli market and to influence it, especially in the evening hours and at weekends and when options are expiring. The Bank of Israel, Ministry of Finance and financial institutions continue to behave as if nothing has happened. Despite all the aforementioned, I think that there are serious factors that will express themselves this year that will push the shekel in the direction of depreciation.
1. The amount of money being converted by exporters will decrease for two reasons - exporters took advantage of the high exchange rates in March and converted a lot of money or hedged themselves and the crisis has brought about a dramatic fall in expenses - layoffs and pay cuts, especially in the tech sector.
2. As a result the current account surplus, which was one of the main factors for the strengthening of the shekel, is expected to be reduced and this we will only see in September 2020.
3. The investment policies of institutional bodies made them big foreign currency sellers in 2019 ($5.7 billion). This year stock exchanges are falling and the institutions will be forced to buy foreign currency.
4. Nobody knows if the stock markets will rise by the end of the year. Although US President Donald Trump will try in every way possible to influence matters so that it will happen, the damage from the coronavirus runs deeper and the global economic damage won't miss the stock markets. The crisis between the US and China has already gone beyond the stage of a game. That will also affect the capital markets.
5. There is a risk that Israel will have its rating cut. The belief that everything will happen smoothly and next year we will return to impressive growth and a reduction in debt is at best wishful thinking, and in a less good scenario ignoring reality and the risks. Nobody wants to think of another wave of the virus and its repercussions. The non-cautious treatment, it would be an understatement to say, of the crisis's damage so far, will exact a heavy price and will require major resources for the Israeli economy to get back on the tracks of sustainable growth.
6. The Bank of Israel must intervene and be much more aggressive. Talk of windows (price range) is not realistic and the market isn't buying them. Talk must be backed up by action and most important of all the position of the window must be changed (at the moment the market thinks it's below NIS 3.50/$), which was set before the crisis. Since then the conditions have changed and in order to help, the Bank of Israel must lift the bottom window at least to NIS 3.55/$, if not to NIS 3.60/$.
7. During the crisis the Bank of Israel injected $7.5 billion into the banks through SWAP instruments such as loans to provide liquidity and resulting in the strengthening of the shekel. These loans will have to be paid back and that will force the banks to raise dollars (which will of course weaken the shekel) but for some reason the bank is rolling on the loan, and providing them with windows of liquidity and for its part, it is continuing to fatten up the big players and encourage them to continue their speculative activities. The Bank of Israel must start to reduce the scale of the SWAP and as soon as that happens there will be a depreciation of the shekel. The banks won't like it because these speculations are a source of large profits for them but the time has come that even the Bank of Israel must throw its weight behind the matter, because meanwhile the Israeli economy is taking a hit and it will be harmed even more by the excessive strength of the shekel.
8. The Ministry of Finance has significantly increased the State of Israel's debt in foreign currency by its recent bond issues ($13 billion since the start of 2020). Everyone with any sense knows that refraining from hedging the debt means paying high interest to the world and a huge risk if the exchange rate changes. The depreciation that took place in March brought about a $12 billion rise in the debt! That's a crazy gamble that no normal country would take. Somebody convinced Moshe Kahlon that it was a well-considered and worthwhile gamble. The country must hope that the incoming Minister of Finance will be more cautious and responsible. Hedging the debt means a depreciation of the shekel.
9. Israel has been conducting more frequent attacks in Syria recently against Hezbollah and Iran. The situation in Lebanon is also warming up. It looks like it is just a matter of time before there will be a response against Israel and then nobody knows where that will lead and when it will stop. In contrast to any escalation in Gaza, development on the Syria-Lebanon front would have a response in the foreign exchange market.
10. The announcement of the annexation of territories would for sure bring about negative developments in Jordan and sanctions from the EU and perhaps even Russia and China. These sanctions will have economic ramifications that might weigh on the shekel and will also impact the forex market.
To sum up, nobody knows in which direction the dollar is going in but it is very reasonable to assume that in the not very distant future we will see the shekel-dollar exchange rate in a new range between NIS 3.60-3.75/$.
The author is a financial consultant and CEO of Energy Financial Risk Management
Published by Globes, Israel business news - en.globes.co.il - on May 21, 2020
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