The effect of natural gas discoveries in Israel on the strength of its currency

Abstract

In light of the natural gas discoveries in the Mediterranean Sea and their impact on the Israeli economy, I must assess the change in the exchange rate and its impact on the foreign exchange market. There are numerous positive social impacts resulting from the gas discoveries including optimising Israel's energy security and its move to cleaner energy. However, not all of the consequences of discovering natural resources may be positive. One possibly negative outcome could be the well-known phenomenon called the “Dutch disease” in which the discovery of a natural resource can cause a country's currency to spike. To investigate whether the strengthening of the Israeli currency in recent years is a symptom of the “Dutch disease” I used daily and intraday event study methodology to explore the changes in the real exchange rate of the Israeli shekel and the US dollar between 2008 and 2017, according to announcements related to the gas discoveries published during this period. In addition, I examined whether an increase in the real exchange rate was a result of the publication of announcements about natural gas harming the manufacturing and industrial sectors. I found that announcements related to gas discoveries did affect the real exchange rate and caused an appreciation of the Israeli shekel. Investors could analyse the announcements and achieve an abnormal return in the foreign exchange market. In addition, investors' expectations of an appreciation in the real exchange rate causes damage to various manufacturing and industrial sectors.