Israeli Exporters: No Choice but to Adjust to a Strong Shekel

As local currency touches seven-year high against the dollar, manufacturers pivot to focus on cost-cutting strategies

Working at the Rav Bariach plant in Ashkelon.
Ofer Vaknin

As the shekel climbed to a seven-year high against the dollar Friday, Israeli manufacturers said they arent counting on the Bank of Israel to reverse the trend and the only solution was to cut costs and move up the value chain to remain competitive.

The dollars Bank of Israel rate was set at 3.415 shekels Friday, a decline of 0.2%. That brought its year-to-date drop to 1.3%, on top of the 11% decline it suffered in 2017. The euro strengthened 0.2% to 4.1198.

Yossi Fraiman, CEO of Prico Risk Management and Investments, predicted a steep drop for the dollar to 3.2 shekels because so many companies had hedged the dollar at 3.5 shekels and will now need to provide collateral.

Bank Leumi said the shekels latest gains would probably lead the central bank to buy shekels in the next few days, noting that the Israeli currency had gained on the greenback in a period when the dollar was not showing weakness elsewhere in the world. The Bank of Israel intervened in the market last week after a hiatus of several months.

Its very difficult to export to Africa and Eastern Europe with such a low dollar exchange rate. These are place where we have to compete with Turks and Chinese, said Samuel Donnerstein, CEO of Rav Bariach, a maker of secure doors and locks.

Nevertheless, I dont believe that the solution to exporting lies with the exchange rate but with the business environment. The [high] cost of municipal taxes and regulation put the Israeli manufacturers in a very different place than their peers in Poland, Turkey, Slovakia or Canada, Donnerstein said.

Manufacturers expressed doubt there was much the central bank could do to fundamentally affect the exchange rate. If you think the dollar rate is going to change, dont, said Lior Levi, whose CEO and owner of Biscol, a small maker of cosmetics and artificial sweeteners.

Even the government has a hard time trying to influence the dollar — it can only do it on the margins. So as a manufacturer, you have to put the future into your own hands. Biscol once sold commodity saccharin-style sweeteners to countries like Russia but now exports more stevia, a more sophisticated sugar substitute, to Switzerland.

But the experience of Rav Bariach, which sells under the name RB Doors and RB Locks overseas, shows how difficult cutting costs and focusing on higher value-added products is to implement. Three years ago it invested heavily to upgrade its production line and based its business plan at the dollar at 3.7 shekels.

Not only is the dollar worth a lot less, wages and municipal taxes have risen, said Donnerstein. Today it earns more than half its exports receipts in dollars and as a result it is barely breaking even on exports.

Israeli manufacturers also face a second hit in the domestic market because the strong shekel makes imports cheaper. On the other hand, companies like Rav Bariach are benefiting from the strong shekel, which reduces the costs of imported raw materials and components.

Donnersteiun said exporters cant rely on the Bank of Israel and said the solution is a concerted program that involves business, labor unions and the government. Finance Minister Moshe Kahlons Net Industry plan, which will allocates hundreds of millions of shekels for innovation and other aid to industry, isnt enough, he said.

Shraga Brosh, president of the Manufacturers Association of Israel trade group, hasnt despaired of central bank intervention and says it should be fighting what he says is speculation by sophisticated traders with similar tools. The Bank of Israel should declare war during bouts of speculation so that speculators move on to other markets, he said.

Brosh said the government should neutralize unilateral transfers of dollars, such as the sale of startup companies to foreign buyers, by barring sellers from converting their dollar proceeds into shekels.