Industry Association's Pension Fund Proposal to Stabilize Shekel Deemed Risky

A position paper by the Manufacturers Association of Israel highlights a growing concern: as institutional investors' foreign holdings increase, the U.S. stock market is exerting a greater influence on the Israeli shekel's exchange rate, a critical factor for Israeli exporters. The association proposes that the state intervene in the hedging activities of these institutional investors to manage the shekel's value.

However, the article argues that this proposed solution is problematic, dangerous, and ultimately ineffective. While acknowledging that institutional investors have become major macroeconomic players, managing trillions of shekels, the paper's statistical analysis attempting to link institutional hedging directly to shekel appreciation is found to be weak when other market factors are considered. The core argument is that the proposed intervention would shift currency risk from institutional investors to the public, essentially transferring the cost of government failure to manage the economy onto ordinary citizens.

The association distinguishes between shekel appreciation driven by economic fundamentals and that driven by financial flows and hedging. The article counters that in an open economy, capital movements and risk management are integral to price setting, and the source of demand for the shekel does not make it artificial. It emphasizes that pension fund managers are not speculators but are tasked with managing citizens' retirement funds, and any intervention to delay their hedging activities to benefit exporters would expose savers to greater currency risk.

The article suggests that instead of manipulating financial markets, the government should address the competitiveness of Israeli industry through structural reforms. These include reducing regulation, bureaucracy, and compliance costs, fostering competition, improving infrastructure, and enhancing human capital. While these reforms are politically more challenging than intervening in currency markets, they address the root causes of competitiveness issues.

Ultimately, the article posits that while Bank of Israel should monitor the link between global markets and the shekel, the government, not the central bank, is responsible for addressing the structural competitiveness of Israeli industry. The Manufacturers Association's proposal risks blurring this distinction and creating moral hazard, potentially weakening exporters' incentives to adapt and hedge their own risks.