Israel’s war on the Gaza Strip continues to pressure the occupation’s economy, as the Bank of Israel reduced its growth forecasts for the upcoming year 2024, citing a “high level” of uncertainty about how long and to what extent the war with the Palestinian resistance movement Hamas would persist. This comes alongside a lack of appropriate government decisions to finance the economic fallout resulting from the war.
The Israeli central bank now expects the economy to grow by 2% in 2024, down from its previous forecast of 2.8% growth for the next year.
Economic repercussions from the war, alongside an expected decline in private consumption, have led the Israeli Ministry of Finance and global credit rating agencies to lower growth expectations in recent weeks. Estimates suggest that the war could cost the Israeli economy more than $53 billion, as recently reported by the “Wall Street Journal.”
The bank’s forecasts indicate that war-related budget costs (spending plus loss of income) could reach 10% of the Gross Domestic Product (GDP) in the upcoming year 2024. The debt-to-GDP ratio is expected to rise to 66% by the end of 2024, according to a recent report by “The Times of Israel.”
This report will discuss several factors that have impacted the Israeli economy due to the war, with the most significant ones being:
Rising Borrowing Costs
Israel has borrowed billions of dollars in recent weeks through privately negotiated deals to help finance its war against Hamas. However, it has been forced to pay unusually high borrowing costs to complete these transactions.
To date, Israel has borrowed over $8 billion since the start of the war with Gaza, inflating the budget deficit to $6 billion. This includes $5.1 billion raised by Israel through three new bond issues and six increases to existing bonds valued in dollars and euros. In addition, Israel has raised more than $1 billion from American institutions purchasing Israeli bonds.
One of the major consequences of the Israeli aggression on Gaza has been a significant increase in interest rates on bonds issued by the State of Israel to attract investors and purchasers.
Israel now pays interest rates ranging between 6.25% and 6.5% for bonds maturing in 4 and 8 years, respectively. This is much higher than the yields for standard U.S. Treasury bonds, which ranged between 4.5% and 4.7% at bond issuance time, adding extra burdens to Israel’s exhausted treasury.
“Israel Bonds” is part of the “Development Corporation for Israel” headquartered in New York City, USA, and was established in 1951 by former Prime Minister David Ben-Gurion.
Its securities are fully backed by the Israeli government, according to its website, and Israeli bonds represent nearly a third of the country’s foreign currency issuances, as reported by Bloomberg in a recent article.
Israeli assets, including the local currency and dollar bonds, have significantly dropped in value since the start of the war, with traders fearing that the conflict could spread to other countries in the region and impact Israel’s economy. J.P. Morgan Chase & Co. predicts an 11% annual contraction in Israel’s GDP.
Increased Costs to Insure Israeli Debt
Costs to insure Israeli debt against default have skyrocketed, doubling from less than 60 basis points in early October to 120 points in November, as mentioned by the Financial Times.
Financial Times experts stated that although markets maintain very high-interest rates on international Israeli debts, concerns compound regarding the war’s impact on Israel’s growth and debt levels, as well as subsequent sovereign ratings, as the conflict continues into its third month without a clear end in sight.
Israel has rarely struggled to find buyers for its debts in the past, but aggressive actions on Gaza have changed circumstances with worsening economic outlooks. J.P. Morgan anticipates a 4.5% budget deficit for Israel in the upcoming year 2024, higher than the previous estimates of 2.9%.
Decline in Foreign Investments
The war between Israel and Hamas casts shadows over the future of foreign investment flows into Israel. Investments of this kind saw a significant decrease in the first quarter of 2023 to about $2.6 billion, according to the finance ministry report, marking a 60% decrease compared to the quarterly rates for 2020 and 2022.
Political turmoil prior to the war, particularly Prime Minister Benjamin Netanyahu-led judicial reform movements, made many foreign investors wary of investing their funds in the country. These reforms prompted capital flight out of Israel.
Following Operation Al-Aqsa Flood waged by Izz ad-Din al-Qassam Brigades, the military wing of Hamas, last October, this became even more problematic for the future flow of foreign investments, with many investors now believing that investing in Israel faces many risks.
The capital venture sector in Israel has seen a sharp slowdown in deal-making since the outset of the war with Hamas, dealing a blow to the country’s technology industry.
Approximately $325 million of total project financing in Israel was invested during the past October through 120 deals, a decrease from $1 billion in 232 deals recorded in the preceding September, according to data gathered by local market research company (IVC) and reported by the Financial Times.
Rising interest rates and declining general valuations for the Israeli economy have slowed investment in private Israeli companies across various sectors, especially the tech industry. The sudden shortage in investments deals a harsh blow to Israel’s image as the “nation of startups.”
Over 40% of tech companies report that their investment agreements have been delayed or canceled, while only 10% have managed to secure meetings with investors.
In a survey by the institute, which included 507 advanced Israeli tech companies, over 70% reported postponements or cancellations of important orders and projects.
For 72 days, Israel has waged a devastating war on the Gaza Strip, which has resulted in 18,800 martyrs and 51,000 injuries, mostly among women and children.
