Netanyahu Bank Succession Bungle Stokes Shekel Surge
Israeli Prime Minister Benjamin Netanyahu’s botched efforts to replace Stanley Fischer have fueled concerns the Bank of Israel won’t keep the shekel in check, hurting the country’s export-driven economy.
The currency is trading near its strongest in three months, and has gained 2.5 percent since the June departure of Governor Fischer, who cut rates and more than doubled reserves while buying foreign currency to moderate shekel gains. Last week, two nominees to replace him withdrew their candidacies.
“Investors are looking at the Bank of Israel with more uncertainty,” Daniel Hewitt, senior economist at Barclays Plc (BARC) in London, said yesterday. “Previously we had Fischer in charge and now we have a group of people sitting there that implemented his policies. One wonders how much vigor they’re going to put into this when they don’t know what’s coming next.”
Fischer’s handpicked deputy, Karnit Flug, is acting as a caretaker until the situation is resolved. The Manufacturers Association of Israel, whose exports are being hurt by the strong shekel, warned that the succession fiasco is preventing the central bank from dealing with the “exchange rate crisis.”
“Any delay in appointing a governor is a strategic threat to the economy of Israel,” Zvi Oren, president of the manufacturers group, said in an e-mailed statement. “The Bank of Israel must immediately increase its exchange rate involvement, in order to moderate the trend of shekel appreciation.”
The strong shekel makes exports, which account for about 40 percent of gross domestic product, more expensive and less competitive.
Rony Gitlin, head of spot trading for Tel Aviv-based Bank Leumi Le-Israel (LUMI), said markets see the limbo at the central bank boosting the shekel.
“The market doesn’t expect any drastic intervention in the market in the interim period until a new governor is in place,” Gitlin said by phone yesterday. “This gives support for the shekel to extend gains.”
The currency strengthened 0.2 percent to 3.5464 per dollar at 5:59 p.m. in Tel Aviv, headed for the highest close since August 2011. TheMarker reported that the Bank of Israel bought between $100 million to $150 million in the course of trading today. The central bank declined to comment.
Netanyahu and Finance Minister Yair Lapid waited until days before Fischer’s June 30 departure before appointing Frenkel, the first of their nominees, to replace him. He announced last week that he no longer wanted the job, saying he suffered an “avalanche” of media abuse after his nomination.
Candidate No. 2, Bank Hapoalim (POLI) Ltd. chief economist Leonardo Leiderman, pulled out Aug. 2, just two days after he was nominated. Flug, who announced she would leave the bank after being passed over a second time, has agreed to stay on until a new governor is installed.
Potential alternatives mentioned by the media include Eugene Kandel, the head of the National Economic Council, Manuel Trajtenberg, a former head of the National Economic Council, and Zvi Eckstein, a former deputy governor.
Lapid has said the next nominee will be chosen after a “slow” and “deliberate” process, while the Ha’aretz newspaper reported yesterday that Netanyahu was considering changing the way in which nominations are made to try to avoid another debacle.
While the central bank is “functioning normally” under Flug’s leadership, the question of who the next governor will be is adding “uncertainty” to the foreign currency market, said Reuben Gronau, central bank monetary policy committee member. Frenkel said in February that intervening to weaken currencies “leads nowhere.”
“Forex markets are by nature uncertain,” Gronau said. “So here is an added uncertainty: how forceful will the next governor be on the forex front?”
Fischer, 69, who left the bank after eight years as governor, has been credited with helping the nation weather the global economic crisis better than most developed countries. In October 2008, he beat the Fed and the European Central Bank by a day in cutting interest rates following the collapse of Lehman Brothers Holdings Inc. He also bought foreign currency in unprecedented amounts.
The shekel advanced by about 5 percent against the dollar this year, making it the best performer of 31 major currencies tracked by Bloomberg.
The currency has been buoyed by the start in March of natural gas production from the Tamar field, off Israel’s Mediterranean Coast. Israel’s gas discoveries are leading the country to energy independence and are set to improve its current-account balance by as much as $3 billion this year, according to the central bank.
For every $1 billion improvement in the current account, which makes the nation less dependent on foreign capital, the shekel strengthens about 1 percent, according to a Bank of Israel estimate.
In April, the Bank of Israel began buying foreign currency for the first time in almost two years after the shekel rallied to an 18-month high. In May, Fischer announced a foreign currency purchase program of $2.1 billion for the year to counteract the effect of natural gas production.
Since then, the shekel has more than regained losses triggered by the purchases and by the double rate cut in May.
While Netanyahu and Lapid consider their next step, some analysts are still rooting for Flug, considered by markets as “the one candidate committed to continuing the policy line introduced by Fischer,” according to Rafael Gozlan, chief economist at I.B.I. - Israel Brokerage & Investments Ltd.
“The crisis will probably generate further upward pressure on the shekel, unless Prime Minister Netanyahu and Finance Minister Lapid finally relent and appoint acting governor Dr. Karnit Flug,” Gozlan said.
Nir Omid, chief investment officer at Tamir Fishman, urged Flug to surprise the market with an unscheduled, mid-month rate cut of 25 or 50 basis points, in order to maximize the effect and weaken the shekel.
“This could be Karnit Flug’s finest hour,” Omid said today. “In the meantime, there is no leadership, and no one holding the reins.”
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