Shekel to shrink?
Shekel to shrink?Israel news photo: Bank Jerusalem

The global market agency MSCI is expected to announce on Monday evening that Israel has been upgraded from an emerging to a developed market, a move could drive up the shekel-dollar rate and cause $2 billion to leave the country.

The probable change in status will take effect in November, but the markets already are reacting in anticipation of a change.

Coupled with Russian support for the U.S. dollar, the shekel dropped in value Monday morning, trading above NIS 3.97 to the dollar. Last week, the dollar was weaker, buying less than NIS 3.90 after the exchange rate reached NIS 4.25 two months ago.

Upgrading Israel will place the local market in the global indices of MSCI, which formerly was known as the Morgan Stanley Investment Fund.

Investors looking fort higher returns from emerging markets are likely to withdraw as much as $2 billion that has been invested in local companies, particularly Teva Pharmaceuticals, Bank HaPoalim, Bank Leumi, Bezeq and Makhteshim Agan and Israel Chemicals, both of which manufacture potash.

Investors on the sell side also were in firm control Monday, sending Tel Aviv Stock Exchange indices down by 2-3 percent.

On the other side of the ledger, funds that prefer developed markets may be drawn to Israel. Another factor working against Israel is the constant threat that the conflict with Muslim countries and the Palestinian Authority will break out into another war.

As usual, there are at least two opinions on which way the shekel will go in the near future. Goldman Sachs estimates that Bank of Israel Governor Stanley Fischer will eventually have to end his policy of propping up the shekel by buying dollars. It forecasts that the exchange rate will drop to NIS 3.7 by this time next year. It tempered its forecast following the news of the imminent decision by MSCI.

The investment house also thinks the Israeli economy will move into “positive growth dynamics" by the end of 2008.

However, Bank of Jerusalem analyst Eitan Admoni told Globes that he thinks the shekel-dollar rate will rise to NIS 4.1-4.2 before the end of the summer because of the expected MSCI decision.