Israel’s economy is booming, the value of the shekel is soaring and investors are flocking to Israel for its comparatively higher interest rates. But that is not entirely good news for a small country where many companies rely on exports and the international marketplace, which account for 45 percent of the gross domestic product (GDP).
The Manufacturers Association of Israel (MAI) warns that a surging shekel could cost companies billions of dollars in profits, cause thousands of job losses and slow overall growth. MAI spokesman Danny Laish told Israel Today that the government needs to intervene and make some changes or the export industry will be headed for disaster.
The shekel is one of the best performing currencies in the world so far in 2008 with a gain of 7 percent against the dollar over the first two months. The Israeli currency has managed to reach a 10-year high against the dollar, dipping below 3.5 shekels to the dollar. It is more than 16 percent higher than in July when $1 bought 4.3 shekels. And the shekel is not just showing prowess against the weakened dollar but is also strong against the euro and the British pound.
Booming Economy
Last year, Israel’s economy grew by 5.3 percent, and it is forecast to grow by more than 4 percent this year. In the second half of 2007 alone, the Israeli economy grew by 6 percent, according to the Central Bureau of Statistics.
This vigorous growth can partly be attributed to former premier Benjamin Netanyahu who, as finance minister in 2003, cut taxes, lowered welfare spending and implemented privatizations and capital market reforms.
“Israel is considered a very good economic success story, and is attracting capital from abroad,” said Leonardo Leiderman, chief economist at Bank Hapoalim and an economics professor at Tel Aviv University.
The Bank of Israel has maintained higher interest rates in order to counteract inflation. Citing the slowing global economy and its probable effect on Israel, Bank of Israel Governor Stanley Fischer, an American immigrant, cut interest rates in March. But he also said that in light of the new challenge of a thriving shekel, exporters will have “to find ways to adapt to this new situation by cutting costs and focusing on innovation.”
Globally Traded
The shekel has made its presence known in the international market as well, becoming one of 17 currencies traded in the global currency market, joining the 15 currencies currently traded, along with the Mexican peso.
This means that Israel’s shekel will be available at all major commercial banks in about 80 developed and developing nations around the world and can be traded in global markets in exchange for any of the other convertible currencies of the developed nations.
The shekel joins the Australian dollar, Canadian dollar, Danish krone, Euro, British pound, Hong Kong dollar, Japanese yen, Korean won, New Zealand dollar, Norwegian krone, Singapore dollar, South African rand, Swedish krona, Swiss franc and the US dollar as globally traded currencies.
The head of the New York-based CLS Bank made the decision to trade the shekel after visiting Israel in 2006 to gauge the strength of its economy and currency. The decision improves Israel’s status among institutional and private investors and international credit rating agencies.
The International Monetary Fund (IMF) also gave the shekel the nod, rating Israel’s economy as “developed,” rather than “emerging.” The FTSE Group, a major securities-index operator, surprised world markets last year, upgrading Israel, rather than South Korea, from an “advanced-emerging” economy to developed.
Apr 1, 2008
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