The shekel and the economy. Interview with former Bank of Israel employee Nadine Bodo Traitenberg. – Israel Valley

The Israeli Shekel has been “too strong” and has come under “undue pressure” – spurred on by the boom in the global market – and the reversal of the situation seen in recent days, which could even lead to the stabilization of international capital. market will weaken the national currency, which this month reached levels not seen in 26 years against the dollar, former Bank of Israel deputy governor Nadine Bodo-Traitenberg said in an interview given by Israel Times.

The representative exchange rate for the shekel is at its highest level since 1995. The shekel weakened against the dollar amid international nervousness caused by the alarming emergence of the Omicron option.

Bodo-Treitenberg explains: “We have something that confirms this hypothesis: with this new version, the markets went badly, and as a result, the shekel weakened. It very accurately demonstrates the strong bond that unites the two of them.”

The currency was supported by a general weakening of the dollar, a booming stock market and overall demand for technology under the influence of the COVID pandemic, which was beneficial for firms. Hi-tech Israelis. In addition, large Israeli institutional investors have decided to hedge the risks associated with their investments in the foreign exchange market by selling their foreign exchange reserves.

The shekel is also supported by the strong fundamentals of the Israeli economy. The country runs a large balance of payments surplus because its exports exceed its imports, especially because of its powerful high-tech industry, which is experiencing rapid income growth and attracting significant foreign investment.

This foreign investment has increased significantly during the pandemic as the world spends more time online, a phenomenon that highlights the importance of technology. Foreign investment reaches record levels in companies Hi-tech Jewish state, with sky-high valuations of private and public companies in the sector and an unprecedented number of companies unicornsa term that refers to private companies with a valuation of more than $1 billion.

“The shekel has been strengthening for ten years, and this long-term trend reflects the fact that the Israeli economy is doing well and that a lot of funds are coming into the country,” Bodo-Traitenberg said.

She adds that the big question now is “is this an unusual situation that will prove to be temporary and will the shekel stay out of what we estimate would be the right level of balance.”

And the answer is yes, she adds. Over the past two years, there has been a “gap” between financial markets, the capital market, and the real economy, she said, causing stock markets around the world, especially the US market and the technology industry, to experience exorbitant valuation.

Bodo-Treitenberg notes that one reason for the startup boom was the abundance of stock markets. “If it were not for this abundance, it would not be so easy to raise funds. He attracted a lot of foreign funds to Israel – funds that, under normal market conditions, would not have come here. It would be a little, but not in the amount that we have seen over the past 18 months.”

Economists in the Jewish state predict that Israel is expected to see $35 billion to $45 billion in foreign investment this year, driven largely by the tech sector.

According to her, Israeli institutional investors had another major impact on the currency. These investors invest a lot of money in foreign markets, especially in the United States, and reap the benefits of rising prices in the stock markets. But because their liabilities are denominated in shekels, they don’t want that part of their assets to be too exposed to foreign exchange fluctuations, and when they see those assets grow, they are insured against this growth. “Which means they are buying shekels,” says Bodo-Traitenberg.

Bank Hapoalim estimates that institutional investors have sold almost $30 billion this year to cover the risks associated with their investments.

Foreign investment and this tendency to hedge risk due to the “abundance” of the capital market put “undue pressure” on the shekel, explains Bodo-Treitenberg. However, “this trend is unlikely to continue over time.” Once international markets stabilize — or if they fall — “much of this inflow of funds will stop flowing to Israel,” she said.

Startups will likely continue to receive funding, but probably to a lesser extent, she continues, and international investors will no longer need to hedge the risks associated with their investments.

A strong shekel is good news for consumers as it makes imports cheaper, keeps inflation low, and lowers the cost of travel abroad. But this is putting additional pressure on the wider local industrial sector and on exporters who pay their workers taxes and expenses in shekels but sell their products in dollars.

If the shekel stays strong, says Bodo-Traitenberg, “some of these industries will have to go.” But if this trend is temporary, she adds, “it would be a shame to let some of these industries die, knowing that they can be sustainable in the long run in the long run.”

And if they are worth bailing out, she continues, the central bank has the funds to intervene in the foreign exchange market to bring down the shekel, and the government can also come up with specific plans to support the industries it needs.

Central Bank intervention in the Forex market – buying foreign currencies, as has been done in the past – to weaken the shekel, although to a lesser extent recently, “may at least slow things down…namely, the possible further strengthening” of the shekel. which she says it could give these industries time to adapt to the changing reality.

The economy has made a transition over the years from a production based economy to a service oriented economy, a sector oriented change. Hi-tech extension.

She noted that when it comes to industries worth saving, the government needs to do “real work” and take into account a number of factors, including the environment.

“In Israel, little attention is paid to the impact on the environment. And we have a very fragile ecosystem… we have nowhere else to go,” she continues. And when it comes to determining which industries are worth saving, the government will have to determine which ones are the most harmful to the environment.

“When we think about the industries that need to be supported, we will have to ask ourselves much broader questions. And I think that very often we have not used our system of tax subsidies enough to induce the public and industry to conduct socially useful behavior.

The average summer temperature could rise by four degrees, according to a 2020 study. The Jewish state is also emitting greenhouse gases at levels typically seen in medium-sized countries, according to a report by state comptroller Matanyahu Engleman released last month.

The tech sector has helped the country emerge from the ravages of the coronavirus pandemic, with the industry not only continuing through the crisis as employees shift to telecommuting, but thriving as demand for teleworking technology rises as businesses, homes and schools turn to the internet to continue your activity.

Israel’s economy is expected to grow 7% this year, according to the Bank of Israel, and 5.5% in 2022, after contracting last year amid the pandemic. The inflation rate should also continue to rise this year, although it will remain within the target set by the Bank of Israel – from 1% to 3%. Thus, at the end of 2021, it should be 2.5%. The high unemployment rate, which rose sharply last year, should continue to decline and reach 5.2% by the end of 2022, the Central Bank predicts.

Demand for technology has driven the value of firms in the sector around the world and across the country skyrocketing, and the country has witnessed multi-billion dollar companies flourish within its borders that will change the face of the economy in the coming decades, experts say.

The fate of firms Hi-tech Type Unicorn never sure, continues Bodo-Treitenberg. These companies can only be important “because the market price of their shares is high… This year they are unicorns, and next year these shares may well be a tenth of their value.”

Israel time.

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