Investing in Israel: Upgrading the Israeli currency rating

It was Harry S. Truman that once said "Give me a one-handed economist! All my economists say, on the one hand...on the other [hand]." Truman's expression is exactly how I feel when I think of the pros and cons of the NIS currency upgrade Israel received last week. On the one hand...there are many long-term advantages to having a strong Shekel rating and an internationally-validated economy. On the other hand...there are some short term effects of such a change that could have long-term ramifications.

Currencies ratings are set by Standard & Poor's, the international credit rating agency. This rating determines the liquidity of a currency which is critical to investment funds. The higher a currency rating, the less volatile and more stable the currency is to mutual or currency funds. If tomorrow the NIS dropped to a DDD rating, the Shekel would be worth 10 NIS to 1 USD or lower. With the new upgrade of mostly A and A+, the Shekel is ready for a steady strengthening, making Dollar goods gradually cheaper and cheaper to the average NIS-earning Israeli.

When the Dollar/Shekel exchange rate falls, certain industries will have to trim their profit margins to compensate for the fewer Shekels they yield from the incoming Dollars. If this is caused by a falling Dollar value, then the loss is somewhat offset by the fact that a weaker Dollar means USD pricing has become cheaper to the entire global economy, boosting sales. But in the case of an appreciating Shekel, there is no boost in global sales, so the Dollar-dominated industries will experience less growth until the market corrects.

The high-tech industry, which is Dollar-dominated, will certainly feel the crunch of needing more USD to pay its NIS payrolls and bills. If the 5-10% difference is more than a 100% of the profit, then some companies might even go under. On the other hand...raising new funds for Israeli ventures will be somewhat easier with an upgraded Shekel since investors' confidence is raised along with Standard & Poor's rating.

Overall, the upgrade comes as good news to Israel. Liquidating Israeli debt and equity will now be easier along with raising money for new ventures. The quality of life for many Israelis will rise as costs for Dollar goods drop and fewer Shekels are needed when traveling and buying internationally. On the other hand...Dollar-oriented Israeli businesses will feel the strain and will have to adjust to tighter margins.

Unless someone out there can find me a good one-handed economist.

David Anthony is a Managing Partner at 21Ventures LLC, a venture capital fund specializing in the investment and development of seed and early stage technology companies. He is also an Adjunct Professor at the New York Academy of Sciences where he teaches technology commercialization to Ph. D candidates, post-doctorates, and faculty from Colombia, NYU, Princeton, Yale, Rockefeller, Einstein and Sloan-Kettering. David has invested and continues to invest heavily in Israel. He also sits on the board of portfolio companies such as Agent Video Intelligence, Orion Photovoltaics, BioPetroClean, Cell2Bet, Energy Command and Control, Juice Wireless, Visioneered Image Systems, and VOIP Logic. For article feedback, contact David at danthony@21Venture.net