Strong shekel threatens Israel's security growth engine
The strengthening of the shekel is eroding the profits of defense exporters, harming their ability to compete with Europe and the US — and raising concerns about production being moved out of Israel. Industry executives warn: If the state does not intervene in the foreign exchange market, jobs and knowledge will move abroad — precisely at a time when the Defense Ministry is seeking to expand local production.
The shock following the dollar's crash to a historic low of 2.90 shekels has not spared the defense manufacturing industry, which in recent years has grown and been characterized by stability amid unprecedented arms sales to an arming world. Most of the significant transactions of Israel's major defense companies are made in dollars, and the currency's 20% drop against the shekel in recent months is eroding their revenues, their ability to compete with companies from the US and Europe, and raising questions about the viability of manufacturing in Israel in the future.
"Inputs have increased in price by 25% to 30% in about a year due to the strengthening of the shekel," the CFO of one of the major defense companies told Calcalist. "We are being eroded, while European companies are improving their positions in the markets and their ability to compete against Israeli companies. They are receiving clear state preference: the governments themselves market their goods, and French President Emmanuel Macron serves as Thales's de facto VP of marketing. I am not asking the government for any assistance like that received by our European competitors — except for understanding the situation and intervening in it. I wonder if the Bank of Israel and the government understand the magnitude of the crisis."
The heads of the defense industries are pinning their hopes on the discussions scheduled to take place today at the Finance Ministry, hoping that they will lead to steps being taken to curb the strengthening of the shekel. According to the same deputy director, "The government must intervene, and there are ways to do this without upsetting the Americans. If they don't intervene now, we will pay heavy prices. Speculators are pouring money into the shekel and strengthening it, and these capital movements dictate the real economy. It always ends badly."
The defense industries warn that neglecting to handle the exchange rate will force manufacturers to move projects out of Israel to countries where production costs are lower, while closing jobs in Israel and exporting knowledge abroad.
This situation may also challenge the policy of the Ministry of Defense, which seeks to dramatically expand the local production base of weapons in order to achieve maximum independence in the field, among other things as a lesson from the restrictions imposed by many countries on the supply of weapons to Israel during the October 7 War.
"Work that leaves here does not come back, and decision-makers better understand this. Investors are not patient with unprofitability over time. The best currency protection is to produce in the currency in which we are paid, and that means we will produce abroad. This is how the Americans lost capabilities in the field of chips and other fields to the benefit of China and the East, and this is what could happen here as well," said the CEO of a long-standing defense company.
Approximately 70% of Elbit Systems and Israel Aerospace Industries' sales are directed to overseas markets. Rafael's overseas transactions also constitute a large portion of sales, although in lower volumes.
For now, the Defense Ministry sees the dollar crisis as a matter for the Finance Ministry and the companies themselves, and is watching from the sidelines. Industries mentioned the ministry’s enormous debt to them — some 13 billion shekels to Israel Aerospace Industries, Rafael, and Elbit, as revealed by Calcalist. “If the Defense Ministry wants to help companies that have been operating under its direction around the clock for more than two and a half years, it should pay the billions it owes them,” said a senior official at one of the companies.
Export-oriented companies usually purchase currency protection to reduce the risks of exposure to dollar volatility. The government-owned Trade Risk Insurance Company said that 55% of its total exposure today is to companies in the defense sector, compared to only 20% two and a half years ago. According to the company's CEO, David Klein, "The enormous demand for Israeli weapons will not be affected by the dollar. I estimate that more companies in the defense sector will seek currency protection and hedge transactions for long periods."
"We don't do a lot of currency hedging, and we don't suffer much from the current exchange rate," said Meir Paderski, deputy CEO and CFO of TSG, which is controlled by IAI and Formula. "We reduce exposure by matching expenses to income in the same currency. The situation could have been worse. Now there are a lot of orders for Israeli industries and there are profits. True, it's more pleasant to earn from a dollar at an exchange rate of 3.8 shekels, but there's still something to earn. These are the troubles of the rich."
"No Work Plan"
The defense industries' large sales volumes sometimes overshadow the daily challenges they face, including dealing with negative sentiment toward Israel in many markets, especially in Europe. A return to intense fighting in the Gaza Strip could bring back boycotts, while European competitors would improve their positions and Turkish arms companies would identify opportunities and try to take over market share.
Against the backdrop of the myriad of challenges, the Government Companies Authority intends to issue IAI and Rafael in the coming year at a value of 80 to 100 billion shekels for IAI and 50 to 60 billion shekels for Rafael. The continuation of the dollar crisis could erode the record profits they have shown in recent years and even affect their value in the offering.
"We are told that a strong shekel is a good thing, that it is a sign of strength, and that high-tech people are whining," said a senior defense industry official. "This is a discussion that completely ignores the long-term consequences. It is impossible to solve this with statements like 'the Israeli economy is at full employment.' The full employment data reflects the state of the economy from two years ago. To say that high-tech people are whining is not a responsible work plan."
