Israel’s economy is on the knife’s edge. Despite financial aid packages from the U.S., the country is beginning to face serious issues at a time when it is exposed, both in Gaza and Lebanon.
According to Bloomberg, on September 16, the finance minister was forced to ask the parliament to approve an emergency deficit increase. It was the second time he made such a request this year. This, combined with the possibility of another tougher war, worried investors.
It should be noted that between May and July, outflows from Israeli banks to foreign banking institutions doubled, compared to the same period last year, to $2 billion. The country’s economic policymakers are more concerned than before the conflict began.
Major economic problems in Israel
Any wartime economy is shaky: the government must finance its armed forces, often through deficit spending, while ensuring that it remains robust enough to pay off its debts when peace comes.
The deficit is now expected to reach 8.1 percent of GDP this year – almost three times as much as was expected before the war. With hostilities expanding further, the deficit will likely still grow. In January, the country’s debt stood at 62 percent of GDP, well below the OECD average.
Investors are not confident in Israel’s ability to recover. The shekel is unstable, Israeli banks are experiencing capital flight and the three largest are reporting a large increase in customers asking to move their savings to other countries or revalue them in USD. Although inflation remains above target, the central bank chose to maintain its previous rate at its August monetary policy meeting for fear of derailing the recovery.
If the war continues next year, the economic situation will deteriorate. Bondholders want reassurance that there is room for more war spending. The rating agencies are also nervous. Fitch and Moody’s say they will probably downgrade Israel again, having already done so once this year.
What is the worst-case scenario
As for the nightmare scenario, few investors have prepared for a wide-ranging war involving both Jerusalem and Tel Aviv.
In the event that this happens, the economy will be hit hard. The cost of the army will skyrocket and investors leaving will derail the banks, then causing the shekel to plummet, forcing the Bank of Israel to step in by bailing out its reserves.
The history of the conflicts has shown that they have resulted in economic disaster for Israel. It would not be surprising if history repeats itself.
