New research from financial services group City Index has revealed that the Israeli New Shekel (NIS) is the currency which has weakened the most since the COVID-19 pandemic, currently standing at a 4.73 decrease against the US dollar (USD), followed by Russia at -4.67%, with the UK, Indonesia, and Australia taking the next three positions with decreases of -3.92%, -3.14%, and -2.20% respectively.
This news may come as no surprise to those who have been following the steady decline of the shekel’s value over the past few months. Since the beginning of 2023, the Israeli currency has depreciated in value by around 10.34% against the USD, having taken a particularly significant dive in value at the beginning of March.
In spite of this data, on Monday Finance Minister Bezalel Smotrich declared that thanks to good budgeting and economic policy, “The Israeli economy is showing relative resilience and stability in a time of global crisis, and the macro data of the Israeli economy are good and strong.”
Israeli economy struggling to keep its head over water
A cursory glance at Israel’s macro data reveals that it is, in fact, struggling to keep its head over water. According to the recently released Melnick State of the Israeli Economy Index for July, Israel’s economy has made no improvement in economic activity despite recent efforts. The business sector is experiencing a sustained slowdown, with significant economic growth deceleration in the second quarter. This slowdown is attributed to a mix of external and internal factors, including global economic sluggishness and uncertainty introduced by legal system changes in Israel.
Key indicators highlight the extent of the slowdown, such as a decrease in revenue in commerce and services, indicating reduced consumer spending. The industrial production index has also been declining, pointing to weakened industrial activity. While there are some positive developments, like an increase in the import index, the overall picture is of a persistently sluggish Israeli economy facing challenges from both domestic and international factors.
Israeli Finance Minister Bezalel Smotrich is seen at a meeting of the Knesset Foreign Affairs and Defense Committee, in Jerusalem, on July 19, 2023. (credit: MARC ISRAEL SELLEM/THE JERUSALEM POST)In his statement, Smotrich criticized the ongoing protest movement against the current government’s attempts to reform the judicial system by undermining the High Court’s authority for “trying to deliberately harm the economy as part of their political struggle against the right-wing government and the important amendments it seeks to pass in the Israeli justice system.”
He continued to call out the “barn burners campaign,” accusing them of being “Powerful forces with huge budgets and unprecedented media backing that slander Israel badly in the economic world with blatant lies and false intimidation and do everything to create panic and negative sentiment in the economy.”
Blatant lies or informed warnings?
One of the few promising indicators within Israel’s current economy is the slowing of inflation, thanks mostly due to the efforts made by Bank of Israel governor Amir Yaron, in the absence of significant efforts from the government.
While the inflation rate is finally somewhat stable, even Yaron himself warned against the hasty actions being taken by the government in its hyper-focused pursuit of judicial reform.
“The main risk to the [bank’s inflation decrease] forecast is the realization of a scenario in which legal and institutional changes will be accompanied by an increase in the state’s risk premium, continued devaluation of the shekel, damage to exports, and a decrease in local investments and demand for private consumption,” he said.
In the days following the Knesset’s vote to pass the first law in its controversial judicial reform plan in July, the world’s top international credit rating agencies — Moody’s, Morgan Stanley, Fitch, and S&P — all warned foreign investors about the increased risk presented by the government’s move.
“The government’s initial judicial overhaul package has been watered down but remains highly controversial and faces strong civil society and political opposition,” Fitch stated in August. “The changes may have a negative impact on Israel’s credit metrics if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment or weakens governance indicators.”
At present, Israel’s economy faces several threats: lower foreign investment in hi-tech due to credit agency warnings; a constantly-lengthening wait for a decrease in inflation due to the shekel’s devaluation; and significantly slowed economic growth. Considering these, one might hope that whatever “macro data” Smotrich has his hands on represents enough positivity to mitigate against the looming economic fallout caused in part by his own government’s hasty actions.
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