Plan B, Blind Luck and Shame

On Monday, Bank of Israel Governor Stanley Fischer will lower Israeli interest rates by a quarter-percent.

On Monday, Bank of Israel Governor Stanley Fischer will lower Israeli interest rates by a quarter-percent. That prediction, which is pretty much the consensus, hasn't moved the shekel-dollar exchange rate one whit. The dollar hasn't rebounded against the shekel because there are stronger forces in play. Dollars are streaming into Israel, as Israelis divest their investments abroad, and also thanks to exports, which continue to flourish despite all.

In any case, the central bank's purpose isn't to support the dollar. That isn't its job. Obviously the governor can't meddle in the forex market directly. Amnon Neubach, chairman of Mega Afek, is wrong to demand the central bank soak up dollars. Israel's entire $28-billion foreign currency reserves wouldn't do the trick: International speculators would pounce and cause financial meltdown.

With 12-month inflation expectations at about 2.5%, and given that the the shekel has appreciated by 6% this year, it's time to lower interest rates. The January consumer price index was flat and the February CPI probably will be too. A cut is in order because price stability is achievable at lower interest.

Next week, after manufacturers realize the cut didn't heal their wounds, they'll move to Plan B: demanding subsidies. Make the taxpayer pay for their overseas marketing, exempt them from port tax, say about half a billion shekels a year.

They won't get it. The money isn't there. Finance Minister Roni Bar-On has other problems. All the exporters can do is hedge better against exchange rate fluctuations. Meaning, reduce the risk involved in a shrinking dollar. The Manufacturers Association checked and found that only 47% of Israel's exporters use financial instruments for currency hedging, and 53% trust blind luck. That is a mistake: these companies are undertaking unneeded risk. The companies must hedge against the vagaries of fate: They can do it through forward contracts, or through options.

If you're exporting and want to set the exchange rate at NIS 3.60 at least, then you go to the bank and carry out a forward transaction. You may a premium in advance, say 2% to 4% (depending on the time frame and the exchange rate you want to lock in): Then, in any case, you'll get at least NIS 3.60 to the dollar. Naturally the premium lowers profit from the deal. That's why managements don't like forward transactions.

Or, don't lock in an exchange rate: Use options. Buy puts and calls and move in the corridor between them. You undertake the risk that the exchange rate will stay within the band of say NIS 3.50 to NIS 3.65. If it goes above NIS 3.65, you pay the entire difference, and if it falls below NIS 3.50, you get the difference from the bank. You're paying only the bank's fees but are undertaking some risk of losing money. The bank is the one that sets the corridor, depending on the range of the transaction and the state of the market. (The bank has to put together the opposite deal, to hedge itself against you.)

Yet even when it comes to financial instruments, the Manufacturers Association abhors the free market. Shraga Brosh, its president, suggests the government become a babysitter and pay up to 50% of the consulting costs of small companies (with turnovers of up to NIS 200 million a year). Have they no shame?