Flug Shekel Sales Sapped by Best Flows Since ’06: Israel Markets
Israeli companies are on course to attract more foreign inflows this year than at any time since 2006, undermining central bank efforts to curb the shekel’s gains and help the export-driven economy.
Direct investment from abroad increased to more than $9 billion in the first nine months of 2013, matching the total for all of last year, according to data from the Bank of Israel. Bank Leumi Le-Israel Ltd. (LUMI), the country’s second-largest lender, expects flows to reach $13.5 billion by year-end, the largest amount since 2006.
With the most startup firms per capita of any country in the world, cash is pouring into Israel as investors from Google Inc. (GOOG) to Cisco Systems Inc. (CSCO) buy local companies, helping the shekel beat every major currency versus the dollar. While that underlines how the economy is growing at twice the pace of the U.S., it’s likely to sap the impact of central bank Governor Karnit Flug’s $5.6 billion of foreign currency purchases.
“A risk to an economy driven by foreign trade is the appreciation of the shekel, which is fueled by large inflows,” Gil Bufman, the chief economist at Bank Leumi Le-Israel, said by phone from Tel Aviv on Oct. 15. “The Bank of Israel’s recent efforts to stem currency gains won’t be enough to change the trend of direction.”
Exports, which make up 34 percent of gross domestic product and have been Israel’s growth engine for the past decade, will drop 1.1 percent this year as the rising currency makes the nation’s goods more expensive abroad, according to the Bank of Israel. The shekel has appreciated 5.6 percent versus the dollar this year, the most among 31 major currencies tracked by Bloomberg. It weakened less than 0.1 percent to 3.5360 a dollar at 11:59 a.m. in Tel Aviv.
The central bank plans to use shekels to buy $2.1 billion this year and $3.5 billion in 2014 in foreign currency to offset the impact on the currency from the start of natural gas production in March. The bank has also this year made discretionary foreign currency purchases to moderate shekel gains. The purchases compare with more than $19 billion in 2009 and $12 billion in 2008 spent under former Governor Stanley Fischer, according to Bank of Israel data.
Flug, who was nominated as Fischer’s successor on Oct. 20 after more than three months as caretaker governor, purchased currency worth $835 million in September to help stem the shekel’s appreciation. The currency still advanced 2.7 percent that month.
“The amount of $3.5 billion a year is very small,” Bufman said. “More will be needed and the new governor will need to reassess the bank’s foreign currency policy and the cost of intervention.”
Tel Aviv-based Check Point Software Technologies Ltd. (CHKP) said on Oct. 21 the impact of currency fluctuations, mainly the shekel’s gains versus the dollar, trimmed third-quarter results by about $3 million. Drug exports from companies including from Teva Pharmaceutical Industries Ltd. (TEVA) fell 50 percent in the most recent quarter from the same three months a year ago, the Israel Export & International Cooperation Institute said Oct. 16.
Traders are the least bearish on the shekel in more than two months. They paid a 1.16 percentage-point premium today for contracts granting them the right to sell the shekel over options to buy the currency, three-month 25-delta risk reversal rates show. That was the least since Aug. 26.
Israeli high-tech companies raised $660 million from local and foreign investors in the three months through September, the highest quarterly amount since 2000, according to a survey by the IVC Research Center & KPMG Somekh Chaikin on Oct. 15. That brought the total for the first nine months of the year to $1.6 billion, up 12 percent from 2012. Google, the world’s largest search engine, purchased map-software provider Waze Inc. in June for about $1.1 billion. Cisco bought Intucell Ltd., another software maker, in January for about $475 million.
“This year has been an absolutely amazing year in terms of the big size of deals, which we are not likely to see on the same scale in 2014,” Oren Bar-On, a senior partner at Ernst & Young in Tel Aviv, said by phone on Oct. 23. “I am not sure how much impact these deals have on the shekel as most of the money is going to U.S. or other foreign investors.”
Mergers and acquisitions among venture-backed Israeli companies are headed for the highest level in 10 years, increasing 43 percent to $4 billion this year, according to Ernst & Young Israel. In the U.S., the value of such deals in the first nine months of this year dropped 58 percent to $9.2 billion, according to the National Venture Capital Association.
Facebook Inc. (FB) is ready to make its third and largest acquisition in Israel by purchasing Onavo Ltd., a mobile-analytics startup firm, the two companies said last month. Adap.tv, Israel’s video advertising platform, was bought by AOL Inc. (AOL) in August for $405 million.
“As part of these deals, money will be converted into shekels to pay taxes and other items and thus the inflows are impacting the foreign exchange,” Bufman said. “Foreign investment isn’t limited to the high-tech industry as we are also expecting deals in other industries” such as insurance and energy, he said.
Israel’s current account surplus increased five-fold to $1.79 billion in the second quarter from a year earlier, the Jerusalem-based Central Bureau of Statistics said in September. Gas production will add as much as $3 billion to the surplus this year, according to the central bank.
“The huge amount of investment at a time of a positive current-account and foreign-portfolio inflows is clearly a challenge for the Bank of Israel,” Murat Toprak, head of European, Middle East and African currency strategy at HSBC Bank Plc, said by phone from London on Oct. 31.
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