Israel’s economy strains as war declaration deepens budget deficit and shekel devaluation

by | Oct 9, 2023 | Economy | 0 comments

Saturday’s morning surprise attack by Hamas has thrown Israel into a state of turmoil, with a tragic loss of lives. This attack marks the first declaration of war in Israel in over 15 years since the Second Lebanon War. The economic implications of such a situation are complex and multifaceted.

One immediate concern is the impact on Israel’s budget deficit. Even before this conflict, the deficit had been on the rise due to a global economic slowdown, increased state expenditures, and decreasing revenues. A potential scenario of a prolonged war is expected to further strain the budget. However, Israel has received support from many countries worldwide, which reduces the risk of international economic challenges somewhat.

The financial markets are also feeling the heat. Historically, markets do not react positively to war, and this time is no different. Tel Aviv Stock Exchange closed with over 6% drop in both major indexes, and there are now fears that the economy may blow as a result.

BDO’s chief economist, Chen Herzog, told the Globes that financial markets and currency exchange rates are likely to reflect heightened economic risk in the coming days. He goes on to say that the weekly direct military expense is at least NIS 1.5 billion. However, there is hope that the formation of an emergency government would result in consolidation around common security and economic objectives, restoring stability and growth in the medium and long term.

Foreign investors are expected to be cautious about investing in Israeli companies, reducing their exposure to the Israeli market. The foreign exchange market is also likely to face challenges, with the shekel’s value expected to decrease further due to the ongoing conflict.

Despite these challenges, economic activity is expected to continue, and key institutions like banks and the stock exchange are set to operate normally.

The economic consequences of the conflict are compounded by other macro-economic factors, including an upcoming Moody’s credit rating report, which is expected to be unfavorable for Israel due to the growing deficit and political crisis.

While drawing comparisons to past events is tempting, the complexity of this situation makes it unique. The likelihood of a prolonged period of uncertainty and economic strain depends on the course of the conflict.

Additionally, the war may have repercussions on oil prices, although the geopolitical landscape differs from the oil crises of the 1970s. Regardless how one looks at current situation, events in the Middle East tend to lead to oil price increases.

In conclusion, Israel’s economic situation was already challenged by an economic slowdown before the outbreak of this conflict. In addition, the Bank of Israel’s plan to fight inflation may now be delayed, as it will likely be forced to reconsider its planned interest rate increases.

Generally speaking, the current economic climate is far from straightforward, and its longevity and broader effects are unknown at this time. One thing is certain: if there was ever a time for divine intervention, this could be it.

Main article photo: Israel’s Iron Dome anti-missile system intercepts missiles launched by Hamas from the Gaza (Amir Cohen/Reuters)


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