Does the NIS 3.80/$ new norm boost Israel's tech sector?

Shekel-dollar ASAP Creative
Shekel-dollar ASAP Creative

While the weak shekel benefits exports and startups raising funds in dollars, there are also drawbacks to the current situation.

NIS 3.80/$ is the new reality on Israel's forex market. Although the shekel-dollar exchange rate briefly touched NIS 3.80/$ for several days at the start of the Covid pandemic in March 2020, the Israeli currency has not been so weak since 2016. Although the shekel is strengthening 0.24% against the dollar in inter-bank trading this morning at NIS 3.799/$, the rate has been about NIS 3.80/$ for 10 days and most market experts do not expect any intervention from the Bank of Israel to sell dollars and see the current exchange rate as the new norm.

A host of factors have weakened the shekel, chief among them the uncertainty of investors surrounding the fate of the judicial reform and the protests against it. Volatility on global markets over the last month, which included declines of about 5% on Nasdaq and the S&P 500, a jump in US government bond yields and worrying signs of a slowdown in China, have led to the strengthening of the dollar against other currencies, and against the shekel in particular.

In 2023, shekel volatility has been extremely strong with daily fluctuations of 0.5% or more in each direction. The market has begun to calm down and stabilize, although at a high and problematic point of NIS 3.80/$, which is fueling inflation, and it is not at all certain that the exchange rate has reached the ceiling.

Mizrahi Tefahot chief economist Ronen Menachem tells "Globes," "If the economic environment will continue pushing the depreciation of the shekel, the current level will be exceeded and financial talk will shift to the next threshold of even NIS 4/$."

Menachem explains that Israel faces several crucial events: "High Court hearings (on whether to strike down the reasonableness law) and concern about paralysis after them, the renewal of the winter session of the Knesset and the question of continuing the legislation, waiting for the biannual reports of the credit rating agencies over the next two months and renewed fears that Israel's rating will be cut. Then there is the question of the continuation of (Bank of Israel) Governor Amir Yaron's tenure. These are all weighty events for Israel's economy."

IBI Investment House chief economist Rafi Gozlan tells "Globes," that NIS 3.80/$ does look like the new normal but he stresses, " "It is possible that we will see a significant shift in September due to the High Court hearing." Gozlan adds that the situation in the world also adds to the shekel's depreciation, "which will also be affected by world markets."

"Interest is accumulating while less money is being burned"

While the depreciation of the shekel hits Israeli consumers and provides an inflationary headache for the Bank of Israel, there are also those in Israel who gain from the strengthening of the dollar, including large tech companies who earn dollars from exports while paying salaries in shekels.

However, it is misleading to see the entire industry as a monolithic block. Companies that are sitting on a lot of cash see their coffers growing, while those that depend on raising capital are being hurt by the current climate. In general, Israel's tech industry is in the eye of the storm when tech leaders at the heart of protests against the government's far-reaching judicial overhaul.

Veteran Israeli investor Shahar Cohen, founder and CEO of Lucid Capital, which manages hedge funds for tech investments, tells "Globes" that the effect on every company is different. "Somebody who raised $5 million a few months ago at NIS 3.5/$ has seen NIS 17.5 million become NIS 19 million. This is a huge difference."

"For small startups, the effect is not significant. The rate of burning cash and not going to fundraising rounds eliminates the interest rate effect. From the point of view of local unicorns like Gong and Rapid - companies that raised hundreds of millions, then the current situation is a kind of lifeline that allows them to survive the crisis."

Cohen adds, "The strengthening of the dollar works in their favor in both directions. On the one hand, interest accumulates on existing funds and on the other hand, they burn less money. Public companies like Fiverr, NICE and Intel, have huge cash reserves, so they benefit from tens of millions of dollars more in interest. But in the big picture, this has a negligible effect on the market cap and share price. Investors do not include these amounts in the calculation of the value, because these amounts are seen as temporary and, despite everything, it is still a small amount of money in terms of the big companies."

"Does the fact that the shekel has weakened so much make Israeli high-tech a little more profitable? Unequivocally yes," another tech investor tells "Globes." "Usually when the shekel weakens so much, it's a good thing for any kind of exporter. For those whose costs are in shekels and their income is in dollars, it's good for them."

A more complex picture for startups

However, the same investor qualifies this and says that in the current reality it is not a "gamechanger" and that the same forces that lead to the depreciation of the shekel are harming high-tech in several other ways. "Israeli startups can't raise money. So let's assume that the companies really have a few more millions, but that doesn't change the fact that the money will run out if the companies don't manage to raise." Indeed, the amount of funds raised in Israel's tech industry has declined significantly this year, as reflected in the report published by Leumitech and IVC in June.

The report found that the total amount of Israeli high-tech companies' fundraising in the second quarter of 2023 was $1.78 billion, down 65% from the corresponding quarter last year. The number of finance round deals in the second quarter of 2023 fell 48% from the corresponding quarter of 2022.

KPMG head of technology and head of international tax Dina Pasca-Raz agrees that for most companies the positive impact is limited. "The main amounts that companies raise, especially in later stages, are mostly intended for expanding the marketing and sales systems outside of Israel, so in this matter, there is no significance to the change in the rate. Bottom line, even if the strengthening of the dollar helped companies, in most cases, it is not a dramatic change, on the other hand, the need to deal with the factor of uncertainty - the exchange rate - creates quite a bit of tension and work."

Poalim Hi-Tech customer relations manager Genya Krupnik concurs that for most of the sector the weaker shekel is not really positive. She says, "Regarding financing rounds, most companies usually keep the funds raised in dollars, therefore, as long as the company does not convert these balances into shekels, the profit is only conceptual."

Published by Globes, Israel business news - en.globes.co.il - on August 30, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Shekel-dollar ASAP Creative
Shekel-dollar ASAP Creative
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