Fischer Has ‘Rich-Man Dilemma’ on Israel Rebound, Barclays Says

By David Wainer and Tal Barak Harif

Aug. 5 (Bloomberg) -- Bank of Israel Governor Stanley Fischer faces a “rich-man dilemma” trying to stop the shekel’s appreciation as the economy recovers, Barclays Capital said.

While Israel will be one of the first economies in the region of Europe, the Middle East and Africa to rebound from the global recession, Fischer can’t afford to stop buying U.S. dollars in the foreign-exchange market because gains in the shekel would hurt exports, Barclays said.

“The fundamentals of the economy are moving the shekel stronger, but Fischer doesn’t want an overshoot,” Koon Chow, an emerging-markets strategist at Barclays Capital in London, said in a telephone interview yesterday. “Fischer has a rich-man dilemma.”

The shekel, up 7 percent against the dollar in the past three months, fell 2.2 percent yesterday to 3.8779. The currency probably will gain to 3.65 per dollar by year-end, Chow said.

Israel’s index of leading economic indicators rose in June for the first time since July 2008, led by foreign trade, the Bank of Israel said July 19. Israel posted yesterday its first budget surplus in six months in July as revenue increased more than estimated.

The central bank said last month economic growth will resume by the end of 2009 and announced on July 27 it will end its program of buying government bonds. The shekel rose to a seven-month high the following day on speculation policy makers also were close to ending currency purchases. Fischer said on Aug. 3 he would continue to buy $100 million per day and may raise dollar purchases in the event of “unusual movements.”

Economic Growth

Israel’s economy will expand 0.3 percent in 2010, after shrinking 1.7 percent this year, according to the International Monetary Fund. That compares with a 0.4 contraction in the euro area next year, after shrinking 4.2 percent in 2009, the data show.

“Emergency policies in Israel are no longer needed and you can’t say the same thing for many countries,” Chow said. Still, the central bank can’t halt the purchases “quickly, because the last thing you want is a sharp appreciation of the shekel,” he said.

The central bank started buying dollars in March 2008 and has since accumulated about $50 billion in foreign currency reserves. It has been purchasing $100 million a day since July of last year in an effort to weaken the shekel and help prop up exports, hurt by the drop in demand caused by the global financial crisis. Exports amount to about 45 percent of gross domestic product, according to the Finance Ministry.

The Bank of Israel has cut the key interest rate by 3.75 percentage points since October to a record low of 0.5 percent as it seeks to revive an economy that shrank an annualized 3.7 percent in the first quarter and as unemployment rose to 8.4 percent in May.

To contact the reporter on this story: David Wainer in Tel Aviv at dwainer1@bloomberg.netTal Barak Harif in Tel Aviv at tbarak@bloomberg.net