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graphs and data

  • The Israeli economy’s average exposure to changes in the exchange rate is close to zero. However, within the economy, there are industries that are exposed to appreciation of the shekel, meaning that their trade profitability is harmed by appreciation, while other industries are exposed to depreciation.
  • About 80 percent of workers are employed in industries that are exposed to depreciation—industries whose exposure to the exchange rate on the expense side is greater than their exposure on the income side. However, the intensity of the average exposure of these industries to depreciation is less than the intensity of the average exposure to appreciation among industries that are exposed to appreciation.
  • The manufacturing industry, which employs about 10 percent of workers in the economy, is exposed to appreciation. The weight of exports  in the industry’s output is close to that of the industry’s direct imports (of inputs) and indirect imports (imported inputs that are used in the production of domestic inputs purchased by the industry).  However, the industry’s exposure to appreciation is due to the existence of significant competing imports that have a negative impact on the competitiveness of domestic producers in the domestic market during times of appreciation.
  • The information and communications industry, which currently accounts for about 7 percent of employment, is exposed to appreciation due to the high share of exports in its output, and due to the small amount of imported inputs.
  • The exposure to appreciation of these two industries reflects a relatively high exposure of high-tech firms in these industries to appreciation. However, we can assume that these industries’ ability to set the dollar prices of their products apparently reduces the effect of changes in the exchange rate on their total income.
  • In contrast, the trade, construction, public services, and other services industries are exposed to depreciation, since they import inputs but export almost nothing.

 

The prolonged appreciation of the shekel in recent years, alongside the significant fluctuations of the exchange rate more recently, call for an in-depth analysis of the effect of these processes on the various industries in the Israeli economy.  The exposure of these industries to the exchange rate, in accordance with the share that imports and exports take of their activities, has an impact on their profitability during appreciation or depreciation of the shekel, and may therefore also have an impact on the volume of activity and employment in those industries, and thereby in the economy as a whole.

 

In a study that will appear in the forthcoming Selected Research and Policy Analysis Notes, economists from the Bank of Israel Research Department calculated each industry’s exposure to changes in the exchange rate.  An industry was defined as exposed to appreciation of the shekel if its short-term profitability, before it could adjust its operations, would be harmed by appreciation, and it was defined as exposed to depreciation if its profitability would be harmed by a depreciation of the shekel.  The more tradable the industry’s output is—whether through export or competing imports—the more exposed the industry will be to appreciation.  This is reflected in the short term in the lower return on output and in lower demand due to cheaper competing imports that harm the industry’s profitability.  In contrast, the greater the rate of imports are in the industry’s activity, the more exposed it is to depreciation that raises the costs of inputs in domestic currency terms, thereby harming profitability.

 

The examination of the industry’s extent of exposure relies on input-output tables for 2014 published in the past year by the Central Bureau of Statistics.  In addition to a direct examination of the rates of export, direct and indirect (through other industries) import of inputs, and competing imports for each industry, the researchers calculated overall indices of the extent of each industry’s exposure by weighting these parameters, as well as weighted indices for the entire Israeli economy.

 

The examination of the entire economy found that the average exposure to changes in the exchange rate was close to zero.  However, within the economy, there are industries that are exposed to appreciation of the shekel, and other industries that are exposed to depreciation (Figure 1).  This distinction is particularly important, since when there is a sharp change in the exchange rate that affects each of the industries differently, the change in profitability cannot be offset or smoothed between industries.

 
   

The analysis shows that the manufacturing industry, which employs about 10 percent of workers in the economy, is exposed to appreciation.  Exports as a share of the industry’s output is close to the rate of the industry’s imports of inputs.  However, the industry’s exposure to appreciation is due to the existence of significant competing imports that have a negative impact on the competitiveness of domestic producers in the domestic market during times of appreciation.  The information and communications industry, which currently accounts for about 7 percent of employment, is also exposed to appreciation due to the high share of exports in its output, and due to the small amount of imported inputs.  A more detailed examination at the industry level shows that the exposure of these two industries to appreciation of the shekel reflects high exposure of the high-tech firms in these industries to appreciation.  However, we can assume that these industries’ ability to set the dollar prices of their products apparently reduces the effect of changes in the exchange rate on their total income.

 

In contrast, the trade, construction, public services, and other services industries are exposed to depreciation, since they import inputs but they do not export or compete with imports.  The industries exposed to depreciation are not negligible.  About 80 percent of workers in the economy are employed in industries exposed to depreciation.  However, the intensity of the average exposure of these industries to depreciation is less than the intensity of the average exposure to appreciation among the industries with such exposure (Figure 2).