There was a time when a strong shekel would have sent shockwaves through the Israeli economy. Exports were the lifeblood of the economy and if the Israeli currency gained too much against the dollar, Israeli products became less price-competitive overseas and corporate profits evaporated. Layoffs would follow, reverberating across the non-export parts of the economy.
Exports are still our lifeblood, but the days when a strong shekel was regarded as a dire threat are gone. The currency has risen no less than 4 percent over the past month and 20 percent over the last year, and today trades a 25-year high against the dollar. No one seems to be particularly bothered.
Well, almost no one. As expected, the Manufacturers Association, which represents Israel’s industrial establishment, issued a dire warning just like it was 1999 about the jobless rate rising again. But in today’s economy they don’t count for much. In the last year the Bank of Israel has been intervening in the currency markets less and less to keep the shekel from strengthening even more than it has, and plans to do even less come 2022.
Why indeed should it act otherwise? The shekel has been going from strength to strength for quite some time now, and the economy has paid no evident price for it. Quite to the contrary. The Bank of Israel expects gross domestic product to grow 7 percent this year and 5.5 percent next year as the economy bounces back from its COVID recession. Exports have been rising, especially exports of services. The government’s finances have recovered remarkably quickly as the booming economy boosts tax revenues and COVID spending drops.
The strong shekel is a function of the new Israel that has been born over the last quarter of a century. We’re no longer an economy struggling to find its place in the global market. Israel today is about high-tech and energy. It is richer than most Israelis realize and, following the stretch of fiscal chaos in the final Netanyahu years, Israel finally has a budget for 2021 and 2022. Despite what you read in the local media, from the point of view of investors and money managers, Israel is a well-run country.
A lot of this isn’t exactly news, but perhaps the money impact of this technology and energy revolution isn’t widely understood.
The money magnet and sickness
Let’s start with high-tech. All those startups not only provide extraordinary salaries and even more extraordinary payouts for their entrepreneurs and investors: they are a giant money magnet. In the first half of this year, foreign investors poured in more than $37 billion into Israel, meaning they bought shekels. That was close to the total for all of 2020 and considerably more than the total for 2019. Nearly all of that went into the high-tech sector.
Energy is the second factor. Israel is still importing oil and even coal but far, far less than we used to because so much of our electric power is now generated by domestically produced gas. Israel is even exporting natural gas, which brings us to another part of the economic revolution: We’re no longer running trade deficits.
Israel still imports more goods than it exports, which was the chronic problem of the old Israel that could never really make a go of it as an industrial power. But these days, we export far more services than we import, again thanks to high-tech.
Thus, even with tourism in the doldrums (tourists spending their money on hotels and restaurants in Israel are classified as as “buying exported services”), Israel still ran run up a surplus in its services account this year.
All of the above means that supply and demand favor the shekel: Dollars are flooding into the country and being repatriated into shekels.
If that wasn’t enough, high-tech has made Israel rich, or more precisely has created a lot of rich people (unfortunately, there are still a lot of poor Israelis, too). Their savings have increasingly gone into foreign investments, so that today more than a third of Israeli financial assets are in foreign currency. Ordinarily, that would create demand for dollars, except that with Wall Street posting constant new record highs, the institutions managing these assets have to sell some of their holdings so that their dollar exposure doesn’t grow too large. That means more dollars being repatriated into shekels.
All of this speaks of economic success, but that raises two questions. Does the strong shekel benefit ordinary Israelis? And, do the seeds of disaster lie beneath all these glowing numbers?
The answer to the first question is certainly yes, at least for now. Inflation has been accelerating in Israel, as it has all over the world, but the strong shekel will no doubt curb price increases for imported products and offset the impact of rising world commodities prices. Some prices may even fall. Israelis daring to travel in the still COVID-infested world will find the cost of hotels and restaurants low when they calculate them in shekels.
In the old Israeli economy, the joy of lower prices was always offset by the pain of possibly losing your job if your employer couldn’t compete in overseas markets and had to cut costs. Those days are gone, but what the strong shekel is doing is making Israel even more dependent on its high-tech sector as our only industry that can compete globally.
On paper, that’s great. High-tech is the future, so what’s the problem? The problem is that not enough of the Israeli workforce has the skills and training to work in high-tech – many of them even struggle to do their jobs in low-tech. Israel can’t become an even more tech-oriented economy if it doesn’t have a growing supply of warm bodies and hot brains. It’s struggling to do that.
The term “Dutch disease” comes to mind. That’s an economy with a strong currency due to one thriving export sector, historically a natural resource, that decimates other export industries. In the prototype case of The Netherlands in the 1970s, the sector was natural gas. Could our 21st-century version of the disease be high-tech?
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