Opinion |

This Could Be Israel's Worst Year Ever, So Why Is the Shekel Doing So Well?

Startup Nation is the new diaspora, and that explains how even in the annus horribilis of 2020, the shekel is going from strength to strength

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One has to wonder what the foreign currency market in Israel could have been thinking on Wednesday: As the Knesset was voting to dissolve itself, bringing Israel perilously close to yet another election, the shekel racked up yet another day of gains against the dollar.

True, it is far from certain that the government is going to fall, but it is hard conceiving of any scenario where Netanyahu and Gantz establish a working relationship and address the massive challenges Israel faces. The choice comes down to either another election (with political paralysis in the months before and after it) or countless months more of dysfunctional government (and then probably elections).

By any conventional measure it’s been a horrible year for Israel. A raging coronavirus, two lockdowns and maybe a third on its way, the worst economic downturn in Israel history and a government that has failed to produce a budget after six months in power. About the only good news has been normalization with the United Arab Emirates, Bahrain and Sudan – and that last seems to be having second thoughts.

Yet, the shekel’s strange reaction to the imminent collapse of the government this week was typical of how the currency has acted all this year. Despite all the crises, it has appreciated nearly 15% against the U.S. currency since March. Wednesday’s representative exchange rate of 3.289 was the Israeli currency’s strongest versus the dollar since 2008.

Several factors have converged this year to power it ahead, among them the weakness of the dollar globally and record high stock markets that have forced Israeli institutional investors to sell dollars to reduce their dollar exposure. Even the devastation wrought by the coronavirus has helped the shekel by preventing Israelis from traveling abroad and deterring them from buying stuff, which means less demand for foreign currency and fewer imports.

But the biggest factor of them all is high-tech. Any worries that the global pandemic would take a toll on the industry have long since passed. Exports of high-tech goods and services are growing, despite the strong shekel. Startups are raising record amounts of capital and the pace of cross-border mergers and acquisitions deals remains strong.

What all this adds up to is lots of dollars flowing into Israel. Foreign direct investment reached close to $16 billion in the first half of this year – nearly matching its total for all of 2019 – even as pandemic was laying waste to the world economy. The bulk of that money goes into tech companies. As far as the global economy is concerned Israel is tech and tech is Israel.

Or is it? People often quip that Israel and Tel Aviv are different countries. Yet if there are two different countries involved, they’re Israel and Startup Nation.

Yes, the companies are founded by Israelis and most of their employees are Israeli, but the Israeli tech industry really belongs to the global economy.

Little Israel

Israeli tech companies sell virtually all their products abroad. Often they set up their headquarters overseas as well, even if their research and development stays in Israel. Many are domiciled overseas. The venture capital they rely on comes from abroad. When they float their shares, they usually do it on Wall Street. And, when they are acquired, the acquirer is almost always a foreign company. English is Israeli tech’s lingua franca.

To its credit, the Israeli government has left the industry alone. The government’s main contribution to high-tech is that the army’s technology units are a sort of school for future engineers and entrepreneurs. Israeli tech doesn’t rely on government contracts and is hardly affected by local regulations.

The upshot is that the government can lurch from one disaster to another. It can have a budget or not have one. It can deal effectively with the pandemic or allow it spin out of control (tech workers have been working at home since the onset of the coronavirus, so what’s the difference). Israel can have elections as often as Bibi would like. As far as the Israeli tech industry and the overseas investors, business partners and customers are concerned, Israel is a different country. That’s why they keep putting money into it even though Israel’s metrics are so stinky right now.

Seeing high-tech as a different country explains a lot about what is going on now, but it doesn’t fully explain the bilateral relationship. It might be more accurate to compare it to relationships between Israel and diaspora Jews. The diaspora Jews may live in another country, but they help Israel financially (more so in the past than today) and have a strong emotional connection.

Financially speaking, Israeli tech is today supporting Israel more than the diaspora ever did and while its entrepreneurs are global citizens they remain surprisingly patriotic. Few pick up and leave for Silicon Valley or other foreign tech centers and sever their Israel connection.

And for that, the rest of us should breathe a sigh of relief. It’s not just that global high-tech is ignoring COVID, it’s thriving. The coronavirus is accelerating technology-driven transitions toward more digitization, robotics and remote services. All of that will on the one hand make the world more global and render national borders increasingly irrelevant; on the other, Israeli tech seems as physically rooted in Israel as ever, if for no other reason than it relies on local innovation mojo. Israeli tech is here to stay and so is the strong shekel.

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