The Israeli business sector is mostly responsible for the downward pressure on shekel exchange rates. Bank of Israel data on foreign currency flows show that Israeli businesses have greatly slowed capital outflows and also brought home extensive foreign investments. At the same time, foreign investors are continuing to invest in Israel. Taken together, these two phenomena are creating the immense pressure that is causing the shekel's appreciation.
In recent weeks, Governor of the Bank of Israel Prof. Stanley Fischer has several times noted that Israelis are liquidating their foreign investments, because of worries about instability, and bringing the proceeds back home. However, the Bank of Israel explains that these are long-term capital flows, which cannot explain day-to-day flows in the market, such as the one that began last night and continued today, which has pushed the shekel-dollar exchange rate down to NIS 3.278/$.
Banking sources who prefer to remain anonymous say that, at present, heavy pressure is coming from foreign hedge funds, which have frequently been blamed for unwanted exchange rate volatility. Although hedge fund activity has been on the rise, it can only explain part of the shekel's volatility.
It should be noted that, in contrast to Israeli companies, there has been no let up in investment in Israel by foreign companies, which has put more pressure on the exchange rate. The effect of total foreign investment on the Israeli foreign currency market was $14 billion in 2007, while the annualized rate this year is more than $14 billion, based on January-May data.
Israeli institutional investors - provident and pension funds, and insurance companies - are an issue in themselves. In recent years, they have greatly increased their foreign investment following the tax reform that eliminated the tax bias in favor of domestic investment. Foreign currency activity by Israeli institutional investors led to a capital outflow of $4.4 billion in 2007, including risk-hedging contracts.
However, not only did the net capital outflow come to a complete halt in January-May 2008, there was a net sale of $300 million, including portfolio-hedging contracts. In annual terms, the difference between 2007 and 2008 will be more than $5 billion by Israeli institutional investors alone.
Published by Globes [online], Israel business news - www.globes-online.com - on July 2, 2008
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