No need for Bank of Israel forex market intervention

Eli Tsipori

Israel's currency is strong because its economy is strong and the strong shekel rewards efficiency and benefits consumers.

From a perspective of several days after the "volatility" in the foreign currency market as the shekel strengthened and the "dramatic" announcement by the Governor of the Bank of Israel Prof. Amir Yaron that the interest rate won't be rising in the near future, several conclusions can be drawn ahead of the next storm on the forex market. The ritual has recurred innumerable times in recent years.

The shekel-dollar rate goes down to some level, say NIS 3.50/$ (and is now still below this level), at which point all those involved in foreign currency deals agree on what must be done. This is translated into expectations that the Governor of the Bank of Israel will do something already, that there will be some kind of intervention - now and immediately - and always on the basis of the same argument: a strong shekel is dealing a lethal blow to the local industry and exporters, the forex market is ruled by speculators and foreign currency sharks, and it is a case of industrialists versus financiers - good guys against bad guys - which is just a hop, skip, and a jump away from demagoguery.

A strong shekel is suddenly portrayed as a bad thing, a distortion of the market that should be corrected, and blame is automatically directed at the Governor of the Bank of Israel, his policy, and of course against the government's policy. This time, Yaron is being accused of zigzagging for responding late to the "drama" and "tumult." Wait a minute - why should he respond?

There are several important problems in all of this constantly recurring "drama" and "upheaval" in the forex market. First of all, there is no drama and no tumult. It is just normal behavior by the markets, and the attempt to call it abnormal is ridiculous (just what does "abnormal" mean?).

Secondly, a strong currency means a strong economy, and vice versa - a weak currency means a weak economy. When the currency is consistently strong, it means that Israel has a strong economy. I understand that there are those who are unwilling to admit this, but in the long term, a strong currency cannot continue to be strong merely because of actions by "speculative sharks."

The strong currency is due to the Israeli economy, which has been performing well for many years, and has a good balance of payments surplus and reputation. This is the reason why, as of now, the markets are not being flustered by the deficit, even though it is setting off alarm bells, and even though there is an excessive campaign based on it aimed at scaring people.

The figures for the July budget deficit were published yesterday, and it can be stated with confidence, at least as of now and the July revision, that the deterioration in the deficit has been halted. The deficit fell slightly to 3.8% at the yearly level, and at least where tax revenues are concerned, there is reason for optimism: they rose 4.4% in real terms in July, compared with July 2018, although this is from a perspective of just one month.

This does not make it less necessary to take preemptive action in case of possible negative developments like a global slowdown or recession, which could aggravate the trend. In any case, both the markets and the credit rating agencies are still showing confidence in the government's economic policy. The markets, especially the bond and forex markets, function as a kind of mirror for economic policy. They tend to "speak" to policymakers through increases and decreases in bond yields or weakening or strengthening of the local currency. For Israel, it can be stated with certainty that as of now, and during recent years, this dialogue is an encouraging one.

Industrialists are automatically portrayed as being harmed by the strong shekel, but this portrayal is also inaccurate. When local industrialists buy equipment and raw materials overseas, they also benefit from the strong shekel, so the picture that industrialists tend to paint is incomplete. Furthermore, the consumers are the most important thing, and the strong economy, the strong shekel, is very beneficial for them in overseas purchases, vacations, and so forth.

What happened in overseas travel and purchases from overseas, which is a huge revolution - a real drama - began with the open skies policy in 2013 and continued with the Internet shopping revolution and the strong shekel. This is a very significant factor in lowering the cost of living. It enables consumers to benefit from cheaper and more diversified services by clicking a mouse, taking cheap flights, and bringing cheap products from overseas. When this is combined with the strong shekel, it constitutes a factor that lowers the cost of living.

The trends in the foreign currency market were described well by Tavor Economic Consultants chairman and CEO Michael Tavor, a former economic adviser at the Ministry of Finance. Here are several of the enlightening points that he raises, and I agree with him completely.

"A strong shekel is first of all a result of economic success, not failure. Had the government failed in its economic policy, the shekel would have weakened, and that would have been no cause for celebration.

"A strong shekel gives Israelis a prize for their economic success, because now they can buy the same products and services for fewer shekels. Israelis took over eight million foreign trips last year. Millions of Israelis took part in them, some of them more than once. The strong shekel enabled them to increase the number of their vacation days, travel to more exotic locales, and buy more products. That is not far from a bonus that employees receive for the success of the business in which they work, and Israelis are glad about it.

"A strong shekel makes Israeli labor more expensive, and therefore reduces our advantage, and is also liable to result in layoffs in less efficient industries. This seems negative, but the strong shekel is forcing us to focus on sectors in which we have an advantage - sectors in which they will still buy from us, despite the high price.

"In any case, despite the strong shekel, the unemployment rate in Israel is the lowest since the state was founded, so that even if Israel's economic power is slightly offset by the strong shekel, the bottom line is still very good.

"There are those who believe that constant and aggressive intervention by public officeholders in the economy is a good thing. I have news for them - it is very bad, and the Governor of the Bank of Israel is not wasting his time and the state's resources to play around with the foreign currency to no purpose. The volume of daily global foreign currency trading is 10 times Israel's GDP for an entire year. That may explain the extent of the Governor of the Bank of Israel's inability to really affect foreign currency trading.

"There are solid grounds for criticizing some of what Moshe Kahlon has done as minister of finance and the reluctance or political inability of Prime Minister Benjamin Netanyahu to play a bigger economic role. Except for minor hitches, however, the economy has been a success story in the past decade, and the weighted rating that should be given to the government for its economic leadership is high.

"The state has been able to maintain conspicuous growth in comparison with the developed countries, reduce unemployment rates to a historic low, slightly relieve strangling regulation, slightly narrow social gaps, close a lag of decades in infrastructure, and increase all of the social (welfare, health) and education budgets faster than the growth in GDP. Had all of this been presented fairly and professionally to the public, the public would have appreciated it."

It is true that the market is not always right, but the interventions in the market by regulators should be proportionate and confined to cases of very extreme market failure, not every time there is a call of some kind of intervention because of pressure from the media and self-interested parties.

As a rule, blind faith in people, phenomena, or market mechanisms, for example, has never been healthy. In the end, however, the market mechanisms are the most efficient in the long term, and that is even more the case in the financial markets, in which the ability of the regulators to exert influence is dwarfed by the power of the markets.

The tendency to regard the markets as capricious is absurd. It is true that they involve psychology of fear, hope, and euphoria, and therefore sometimes fluctuate sharply in both directions, but in the long run, they are right. Believe what the markets are telling you about Israel's economy in the long term. Don't believe the people who have an axe to grind: the economy here is strong - very strong - and that is why its currency is strong. There is no need to intervene in the market. When the economy weakens, you can be sure that the markets will tell you about it.

Published by Globes, Israel business news - en.globes.co.il - on August 7, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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