Shekel shortly jumped yesterday after the unexpected announcement by the Israeli Bank of ending currency purchases as part of the program to compensate for the impact of natural gas production on the exchange rate.
The interest rate leap in the shek sector was probably only the initial reaction to investments in the foreign exchange markets, because, according to all assessments, the cessation of purchases in foreign currencies under the program will not have a real impact on the exchange rate. It should be emphasized that the Israeli Bank has not changed its policy on the forex market; it can freely buy foreign currencies outside the program framework, as has often been done in recent years. Here are the answers to some questions about the currency purchases of the Bank of Israel.
What is the foreign currency purchase program to counteract the gas effect?
Former Governor of the Bank of Israel prof. Stanley Fischer initiated the program in response to a unique isolated event that caused panic in the Bank of Israel. In March 2013, the Israel natural gas tank began to supply gas to Israel. Israel Electric Corporation (IEC) power plants (TASE: ELEC.B22) and other customers have turned to local gas consumption instead of imported fuels – diesel, oil and coal – for which IEC paid in foreign currency.
Moreover, reports of the imminent signing of Tamar gas export contracts triggered market expectations related to the inflow of foreign currency into the economy and significantly strengthened the shekel, resulting in an effect known as the Dutch disease. Rumors sparked a wave of speculative purchases, resulting in the Shekel rising 12% against the dollar in a short time.
Fischer decided to stop this trend by obliging the Israeli Bank to purchase a certain amount of foreign currency that would compensate for the actual impact of gas production on the exchange rate. The Israeli bank withdraws from this program at the end of five years, during which it bought a total of almost USD 14 billion.
Why was it now decided to close the gas program?
The decision time was not random. Every year, in November, the Israeli Banking Committee meets to determine the volume of dollar purchases for the coming year as part of the plan. The decision is made on the basis of a professional estimate, which it seeks to estimate, if purchases in foreign currency were reduced by replacing local gas for imported crude oil and coal paid in foreign currency. In recent years, this amount amounted to USD 1.5 billion and it can be assumed that the amount in 2019 will be similar. However, the Committee recognized that the program was no longer needed.
What impact will the closing of the program have?
Yesterday's announcement of the completion of the gas program by the Israeli Bank showed that there is a relationship between the decision to end foreign currency purchases in 2019. And the anticipated creation of a state property fund in the same year. Fischer initiated the purchase program in foreign currencies only as a temporary solution to the pressure on the appreciation of the shackles caused by gas production. A permanent solution to this problem should be the Israeli Civil Fund, which was set up to invest the taxes paid by Icchak Tshuva and his partners in gas tanks for their surplus profits from the sale of gas outside of Israel.
What is strange about this story is that, as announced, the gas fund will start investing money abroad only in 2020. Why was it not decided to continue the program for another year, by 2020? The real reason is that there was no real justification for the program, in addition to maintaining the credibility of the Bank of Israel. As explained by Psagot Investment House Ltd., chief economist Ori Greenfeld, this amount is relatively small, and the fact that it was published in advance and carried out during the year meant that its actual impact on the exchange rate was negligible. The annual volume of purchases in recent years amounted to USD 1.5 billion, which is about half of the daily turnover on the forex market.
Was the end of the term of the Governor of the Israeli Bank Karnit Flug the reason?
The possibility that the outgoing Israeli Bank governor, Karnit Flug, wants to leave his future successor empty desk has been mentioned in the markets as a possible explanation for the closure of the fund. The Bank of Israel replied in response: "The exchange of governors did not constitute remuneration in any form."
What happens to the state property fund?
Little. The act on establishing the fund was passed in 2014, but the fund will be established only in 2019. The reason is that the receipt of a special tax will start only after the cumulative profit of gas generators has reached a certain ceiling. The updated time to do it according to the forecasts of the Israeli tax authority is the end of 2019.
During the proceeding for the creation of the fund, the Israeli Bank expected that 20 billion NIS will be gathered by 2040, but the Israeli Bank has published a more pessimistic forecast in 2015. Meanwhile, it turns out that the government is in no hurry. set up a fund. According to the law, the fund is to consist of a board and investment committees. The Appointment Committee, headed by a retired judge, with the participation of the General Manager of the Governing Council, the Director General of the Ministry of Finance and the Deputy President of the Bank of Israel, must commend members of the commission. None of the council members has been appointed yet.
Published by Globes, Israel business news – en.globes.co.il – November 13, 2018
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