Guy Beit-Or, the chief economist of Psagot
02/01/2022
2021 is already in the books and you have probably already read enough summaries about the year in the markets and what are the expectations for 2022. Today we will dedicate the column to the shekel.
The shekel strengthened in 2021 by 7.9% against the currency basket, an appreciation on an annual scale that has only been seen twice in the last 22 years (in 2000 and 2018). Against the dollar, the shekel strengthened by “only” 3.4%, while against the euro it recorded a 10% appreciation, as well as an order of magnitude that has only been seen twice since the founding of the euro (in 2010 and 2015).
To understand where we are going, to understand where we came from. When we analyze the shekel, we like to divide the effects on it into two main types – structural effects and cyclical effects.
In our view, from the 2004-2005 region onwards, the shekel has entered a long period of structural adjustment to the environment of a recovering Israeli economy that has continuously closed gaps with the world. After the dramatic reforms of the economy in those years, there was a basis for structural change in the Israeli economy which was reflected in particularly rapid growth that led to the closing of Israel’s GDP gap and a consistent decline in the unemployment rate. To put it bluntly, in 2005 GDP per capita in Israel (adjusted for purchasing power, at constant prices) was $ 30,000 and in 2021 it was (according to the IMF forecast) at $ 41.1 thousand. This is a 37% increase in GDP per capita during the period, while the GDP per capita of an average developed country rose by more than 23%. Want more? The unemployment rate in Israel in 2005 was almost 9.0%, while in November 2021 it was (without the corona effect) 4.5% and before the outbreak of the crisis, the unemployment rate in Israel was only 3.7%. If we add to this the fact that during this period Israel also became a regional gas power and high-tech exports became more and more dominant in its effect on the balance of payments, it is easy to understand why the shekel strengthened so much during these years. So much so, that in our heads the consciousness has been fixed that basically the shekel will always have one direction – appreciation.
To this feeling that the shekel can only strengthen, we also received further reinforcement from the cyclical effects that for the sake of simplicity in the column, it is represented by the global stock markets. We will not go into depth but will be content to note that the shekel is considered a cyclical currency in the sense that when we see increases in global stock markets, the effect on the shekel will be for appreciation. And what has happened in the global stock markets in recent years in particular and since the global financial crisis in general? The tools of quantitative easing and zero interest rates have been introduced to the world and contributed to impressive increases in markets throughout these years with a number of years that were more problematic – the debt crisis in 2011, the end of US quantitative easing in 2014 which led to a worldwide dollar rally, In the US they reached a peak. Coincidentally, in these years alone we have seen a weakness of the shekel (in a world of post-financial global crisis). The feeling of the unstoppable shekel has also been strengthened in recent years by these global trends – we are after 3 years of very unusual returns in historical terms in the stock markets, which has put further pressure on the appreciation of the shekel.
So is there ever resilience? After all, the forecast – never resilience. First of all, since 2005 the pressure to appreciate the shekel has been structural and has been very strong because the Israeli economy has many gaps to close. Think of these years as years of equilibrium convergence. However, in our estimation the process of entering equilibrium has already ended in the 2018 region and since the more significant effect on the shekel has actually come from the side of global markets and in our estimation, cyclical factors will continue to be more dominant in the coming years.
However, it should be noted that this year another structural effect may enter that will give another boost to the shekel and that is the possible entry of the Israeli stock indices into the MSCI Europe index. This move, if realized, will lead to the entry of foreign capital into the Israeli stock market and will support the shekel. but! And this is important, the more foreign money there is in the Israeli capital market, the more dominant the cyclical effect will be in the coming years.
In our view, over the coming months volatility in global markets will increase significantly and therefore, our tendency is to estimate that the shekel will actually weaken over the coming months.
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