Israel's economic growth is gaining momentum, which will strengthen the shekel in the medium and long term, says Barclays Capital in a new review. However, it warns that over the next few months, the risk-reward for going long on the shekel is not overly convincing, because the Bank of Israel will only gradually raise the interest rate.
Barclays Capital predicts that the shekel-dollar exchange rate will fall to NIS 3.50/$ by the end of 2010 and $3.40/$ by the end of 2011. Its prediction that the shekel-dollar exchange rate would be NIS 3.65/$ at the end of 2009 was accurate: the actual rate was NIS 3.68/$.
These exchange rate predictions are line with the predictions of other foreign banks, including Merrill Lynch, Morgan Stanley, Goldman Sachs, and JPMorgan Chase & Co., all of which predict that the shekel-dollar exchange rate will fall to NIS 3.40/$ over the next couple of years.
Barclays says that strong exports are pulling Israel though "growth renaissance". The economy is gaining momentum with both production and domestic demand recovering. Israel's GDP rose by 0.7% in 2009, after a brief recession of two quarters. Barclays warns, however, "a recent deceleration of exports could presage a deceleration of GDP growth."
Exports account for more than 40% of Israel's GDP growth. High-tech exports, which account for 46% of manufactured exports, fell 18% in December-February.
Barclays says, "Israel has made considerable progress toward gaining control of its fiscal deficits." The deficit in 2009 was 5.2% of GDP, less than the maximum target of 6%, and it expects the deficit to undershoot the 5.5% of GDP target for 2010.
Barclays also notes that the Ministry of Finance aims to reduce public debt to 60% of GDP over the next decade from the current level of 80%. It says, "Israel's attitude towards government deficits has changed. The Ministry of Finance has adopted a framework that employs a fiscal rule to limit growth of expenditures to less than nominal GDP growth. Israel is in a position to borrow on international markets, but has realized that deficits and borrowing harm the private sector."
Barclays Capital says that Bank of Israel is phasing out reserve purchases and retains the goal of returning to a floating exchange rate. Another means of slowing down the rate of appreciation of the shekel is for the Bank of Israel to keep the interest rate lower for longer.
Barclays Capital predicts that the interest rate will reach 2.25% at the end of 2010, less than its previous forecast of 2.75%.
Published by Globes [online], Israel business news - www.globes-online.com - on March 17, 2010
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