* Shekel at its strongest against dollar since 2011
* Exporters face diminishing competitiveness
* Israeli economy going through period of transition
By Steven Scheer
JERUSALEM, April 6 Arie Levin envisions a time
in the not too distant future where his micro electronics
company, AVX Corp, may no longer have operations in
Due to a sharp appreciation of the shekel against the dollar
, AVX, which was founded in 1972 and makes components for
wireless products, has already shifted some of its thin film
production from Jerusalem to the Czech Republic.
"The deterioration of the value of the dollar versus the
shekel has contributed to a 20 percent increase in our costs,
which narrows down the profit margins and forces us to look for
other solutions," said Levin, head of AVX Israel, which is 70
percent owned by Kyocera.
"I now have more Czech employees than Israeli," he said,
noting his Israeli workforce has shrunk to 250 from 600, with
many of the layoffs coming in the past year as the shekel
"If nothing changes, I envision I will be under pressure to
move more and more and that is the last thing I would like to
The shekel stands at 3.47 per dollar, near its strongest
level since August 2011. It has appreciated 15 percent against
the dollar over the past year and a half, making it among the
world's strongest currencies and hurting Israeli exporters.
With exports making up as much as 40 percent of economic
activity, exporters have been vocal about their diminishing
competitiveness, especially as it has coincided with a spike in
salaries, food, fuel electricity and petrol prices and other
living costs, and economic weakness in Europe and the United
States, Israel's two largest trading partners. The strong shekel
has also made imports cheaper, adding to local producers' woes.
Many firms accuse the Bank of Israel and government of doing
little while their profits shrink and factory job growth has
been frozen the past two years. Companies say they are surviving
by buying supplies abroad, cutting back on certain products for
export and trimming other costs.
"The price you got two years ago in U.S. dollars is not
enough today. It's almost losing money," said Sam Donnerstein,
chief executive of security door maker Rav Bariach.
Analysts believe Israel's economy is going through a
transition since the discovery of two huge offshore natural gas
wells. Tamar started production a year ago, and the larger
Leviathan is slated to come on line in 2016 or 2017, with 40
percent of reserves earmarked for export.
"Natural gas is going to be the driver of the economy," said
Bank Leumi chief economist Gil Bufman. "The export sector is
paying the price of the strong shekel, which is in part due to
Prior to the global financial crisis, exports rose by around
10 percent a year but Bufman doubts they will grow by double
digits again - even when the global economy recovers. Exports
fell 0.1 percent in 2013 after a 0.9 percent rise in 2012.
"It's a long-term process but it has been showing up clearly
in the data the last few years," Bufman said. "Something
structural has changed in the economy and export element."
The Manufacturers' Association estimates that nearly 30
percent of medium and larger manufacturers now have production
lines abroad, up from 16 percent a decade ago.
At the same time, exporters are projected to lose about $4
billion in 2014 - $3 billion in export deals which could have
been won if a better price had been given and another $1 billion
in local sales because imports have become cheaper.
That will result in 8,000 fewer new jobs, the group said,
noting that sales of textiles, rubber, plastic, machinery,
medicines, wood, paper and electrical equipment from local firms
have slid between 6 and 20 percent over the past 5 years.
"It is really bad," said Amir Hayek, the association's chief
executive. "If the situation continues, manufacturers will have
no choice but to move near customers or raw materials."
The shekel has been underpinned by the start to natural gas
production at Tamar a year ago. With fuel imports sharply lower,
it boosted Israel's current account in the balance of payments
to $7.2 billion in 2013 from $800 million in 2012.
The Bank of Israel set up a programme to offset the gas
impact on the current account, buying $2.5 billion of foreign
exchange in 2013 with plans for another $3.5 billion this year.
The government has also established a sovereign wealth fund
to prevent the so-called Dutch Disease, whereby a sudden
explosion in national wealth overheats the economy and
undermines exports - but its impact has yet to be felt.
In addition, the central bank has been buying foreign
currency outside of the natural gas programme when it believes
the currency is not reacting to fundamentals. Since 2008, it has
bought about $55 billion of foreign currency - mostly dollars -
with $2.1 billion purchased in the first two months of 2014.
Its total of $84 billion of foreign currency reserves is
even higher than that of Britain, and the central bank contends
that without the purchases, the shekel would be even stronger.
Interest rates have also been lowered to narrow the gap with
other countries. The benchmark rate was reduced to 0.75 percent
- its lowest level since November 2009 - from one percent in
February, the fourth such move since the start of 2013.
While the Bank of Israel prefers a weaker shekel to help
exports, it understands its reach is limited since a large part
of the currency's strength has been economic growth that has
outpaced the rest of the West and large foreign capital inflows
partly fuelled by the purchase of Israeli high-tech firms.
Despite a scant rise in exports, Israel's economy grew 3.3
percent in 2013, helped by gas production, compared with average
growth of 1.2 percent for OECD countries. The Bank of Israel
expects 3.1 percent in 2014 and 3 percent in 2015, although on a
per capita basis the rates are far lower due to Israel's annual
population growth of nearly 2 percent.
Karnit Flug, Israel's central bank chief, believes exporters
must learn to live with a strong shekel.
"The more basic industries obviously have a harder time
competing given the more appreciated exchange rate, and
therefore, they really need to adjust and improve their ability
to compete," Flug told Reuters.
She said most of Israel's exports are concentrated in the
high-tech sector and can compete despite the stronger shekel.
"The appreciation of the exchange rate, most of it is
actually coming from the fact that the economy is doing
relatively well," Flug said.
"It's related to fundamentals. It's related to the fact we
have a current account surplus and we have substantial FDI
(foreign direct investment) so these are part of the positive
aspects of the economy, which leads to the appreciation. Some
industries will definitely have to adjust," she said.
According to the Israel Export & International Cooperation
Institute, there are more than 4,000 export companies in Israel.
For now, most are staying put, hoping that the Bank of
Israel's actions ultimately lead to a weaker shekel.
The government has vowed to help exporters but so far action
has been mainly in the form of the Finance Ministry hedging some
of its dollar-denominated debt by buying dollar forward
contracts while the finance and economy ministries pushed
through an aid package for exporters that includes an insurance
"What we need to do is help exporters be more competitive
and create more incentives to invest more in research and
development," said Morris Dorfman, deputy head of the National
Economic Council in the Prime Minister's Office.
Hayek, the Manufacturers' Association chief, believes that
for manufacturers to survive in the long term, a dollar-shekel
rate of 3.80 is required, or a depreciation of 10 percent from
He and others have urged the Bank of Israel to support a
floor for the exchange rate, although the bank has so far nixed
the idea. Zvi Eckstein, a former Bank of Israel deputy governor,
said a floor should be set around 3.3-3.4 shekels per dollar.
"Everyone would agree that below 3.6 or 3.5 is out of the
medium term equilibrium," he said. "Once you set a limit to the
strength of the shekel and the exchange rate is around that
level for a while then it limits the ability of speculators to
Bank Hapoalim chief economist Leo Leiderman said a floor
would benefit only speculators and that encouraging efficiency
and productivity would be the best way to help exporters.
"Attractive countries go together with stronger currencies,"
Leiderman said. "The lesson learned is central banks shouldn't
go against the general trend of the exchange rate."
(Reporting by Steven Scheer; Editing by Giles Elgood)