Opinion

Hail the Mighty Shekel, the Real Reason Israelis Are So Well Off

As Israel heads to another election, the markets clearly don't think the economy will be worse off with Netanyahu as jailbird instead of Bibi as boss

David Rosenberg
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Netanyahu
PM Benjamin NetanyahuCredit: Emil Salman
David Rosenberg

As Israel goes back to the polls for a third election inside a year, we should be reminded just how rich Israelis have become since Benjamin Netanyahu took office, and how many voters plan to reward him with their vote.

Prosperity is a good part of the reason Likud is holding its own in the polls, which is pretty impressive given that its leader is under indictment and is bearing the blame for the fact that we’re going into an unwanted election. 

Israelis have waxed rich not just because wages have been rising for the last five years, or because taxes have been cut and prices have barely budged (not counting home prices). It's mainly because of the strong shekel.

Since Netanyahu took office March 31, 2009, the Israeli currency has appreciated no less than 17% against the dollar. Against the euro, it has gained 31.1%. Over the last 15 years, the shekel has gained the second most among all the major world currencies against the dollar, putting it ahead of such traditional musclemen as the Swiss franc and Singapore dollar.

The shekel's gains aren't theoretical: they explain a lot of the spending spree that Israelis have been happily engaged in over the last several years. Prices of imported goods at shopping malls and supermarkets haven't always tracked the strength of the shekel. But when you buy on Amazon, Alibaba and eBay, as increasing numbers of Israelis do, the dollar-denominated price drops for Israelis every time the shekel appreciates. When Israelis fly abroad, as they are doing in record numbers because airfares and hotels are so cheap, they do shopping in ever cheaper foreign currencies. The strong shekel adds immensely to their buying power. 

Ironically even the problems Israelis face – notably high home prices and traffic-clogged roads – are the direct outcome of nearly two decades of economic growth. Netanyahu’s government has been remiss in developing better public transportation and increasing the inventory of homes, but the other half of the problem is that Israelis are buying cars in record numbers, and feel confident they can cover the expense of buying even at outrageously priced home.

As he marvels at his home filled with gadgets, his new car in the driveway and the prospect of taking yet another trip to Europe, should the average Yossi be giving Netanyahu the credit?

Harm not done: Check

Not really. Elected officials routinely make promises about how they can create jobs and encourage business, but their actual powers consist mainly of avoiding doing damage.

That's not as easy as it sounds because politicians are under constant pressure make things worse by giving in to special interests or easy populism.

In the case of the shekel, Netanyahu has adhered to the wisdom of Hippocrates to “first do no harm” but on the balance Israel’s the strong shekel has more to do with factors far beyond his control.

One is the high-tech boom that led to a flood of foreign capital entering Israel, to invest in startups or to buy the best of them, like the navigation app Waze and the self-driving tech maker Mobileye. A lot of the proceeds go to foreign investors who own these companies, but enough makes it way to Israel and converted into shekels to create demand for the currency

The second is natural gas, which luckily for Netanyahu started to reach the market four years into his stint as prime minister. Israel’s import bill has dropped as gas replaces coal and oil as our main source of power. We need fewer dollars than in the past to pay for energy.

The third factor is Israel’s enviable economic metrics. GDP growth has outpaced other developed countries. Inflation is so low that the Bank of Israel is actually trying to boost it. Israel's current account has been in surplus for many years. The government has kept the budget deficit reasonably low and reduced debt as a percentage of GDP, which foreign investors like. Its fiscal performance has started to unravel but not enough to give them jitters.

The economy is so strong that even after months of political uncertainty and the absence of a government, the markets remain sanguine as ever. Indeed, their indifference is a clear signal that no one honestly thinks that the Israeli economy will be any worse off with Bibi as jailbird than with Bibi as boss.

Bibi didn’t discover the gas or create a billion-dollar app. Most of the government policies that contributed to growth – lower taxes, and an ultimately abortive effort to push Haredim into the workforce, for instance – were the other work of others and go back to the days when Bibi was finance minister at the start of the millennium.

When Yossi goes to the polls yet again in March, he should take that into account. Bibi isn't his sugar daddy.