Four months of war weigh heavily on Israel’s economy | International

Since its birth in 1948, the State of Israel has only seen its credit rating improve. An economic, military and technological power well above its demographic weight, the country has overcome – with the help of the West – recurring explosions of violence and global financial crises, after having left behind the socialist legacy of Zionist pioneers and oriented towards exports. (civilian and military) and attract foreign investment. This Friday, after more than four months of war in Gaza which have driven away investors and tourists and during which Israel has mobilized some 300,000 reservists and footed the bill for some 200,000 people displaced from the borders with the Gaza Strip and the Lebanon, Moody’s became the first international credit rating agency to lower its rating: from A1 (medium-high) to A2. Additionally, it changes the economic horizon to “negative”. “There is nothing to worry about,” replied Prime Minister Benjamin Netanyahu. Analysts aren’t so sure. For the moment, the two main indices of the Tel Aviv Stock Exchange fell moderately this Sunday, the first day of the week in Israel: 0.61% and 0.74%.

Like the rest of the rating agencies, Moody’s has been rating Israel for about three decades. The score is on the rise despite the Second Intifada (2000-2005), a war with Hezbollah in Lebanon (2006), the covid pandemic and even the impact of the conflict in Ukraine. If he does so now, it is not only because the country is plunged into its greatest conflict in half a century, but also because the future looks bleak.

What does the reduction mean to you? First of all, it will cost it more to finance itself on international markets, at the very moment when it is going to issue bonds to fuel the war machine. Companies also obtain funds from abroad.

In its report, Moody’s emphasizes that “the main factor” behind its decision is “the assessment that the ongoing military conflict with Hamas, its aftermath and its broader consequences significantly increase political risk for Israel and weaken its executive institutions », legislative and legislative. its fiscal strength in the near future. With an important addition: “Even if the armed confrontation in Gaza diminishes in intensity or stops, there is currently no agreement to bring a lasting end to the hostilities, nor any long-term plan that would fully restore, and ultimately strengthen , the security of Gaza. Israel.”

13% of GDP

The Bank of Israel estimates that the conflict will cost Israel between 2023 and 2025 approximately 255 billion shekels (approximately 64 billion euros or 69 billion dollars), or 13% of the GDP estimated for 2024, both due to the increase in civil and military investments. expenditure as well as the reduction in tax revenues. Moody’s estimates that the defense budget will double at the end of 2024 compared to 2022 and increase by half a point of GDP in the years to come.

However, this is not what most worries the agency, which recognizes in its report the solidity of the national economy and has done so de facto taking four months to lower the bond rating, whereas in other disputes it is immediate. Rather, it is a feeling that no one knows when it will happen or what exactly the “total victory” Netanyahu aspires to will consist of. The Prime Minister said on Sunday that this was “within our reach”; a week before, which will be achieved in “months” and not in years. Currently, he is preparing the forced transfer of more than half of the 2.3 million Gazans to invade the Rafah region.

Moody’s, whose experts have met for months with Israeli official representatives, mention these uncertainties in their report: “it is not clear” whether the second ceasefire will continue, with an exchange of prisoners for hostages that the mediators have been negotiating for weeks. ; that Israel rejects the plan drawn up by the United States for the next day in Gaza; and that the political crisis and social polarization highlighted by Netanyahu’s judicial reform will likely resurface as soon as (it does not appear to be long) the created concentration government is fractured. expressly for the war. More and more people are taking to the streets to demand early elections. Fitch, another of the main rating agencies rating, plans to publish its findings in early March; Standard & Poor’s, in three months, but could bring them forward.

These are minor problems compared to the prospect of war with Hezbollah. Israel and Lebanese militias wage measured skirmishes daily, but one misstep can lead to escalation. Since October, Israel has relocated some 80,000 residents of the border area to hotels or apartments. It will only return them if the “security equation” changes. And as Defense Minister Yoav Gallant threatens every week, this will only happen in two ways: through diplomacy (several countries are negotiating an agreement behind the scenes to keep Hezbollah away from the border) or by force. weapons. Moody’s indeed considers the risk of a large-scale conflict with Hezbollah, a militia much more numerous and more armed than Hamas, as “significant”, “even if both parties are aware of its very negative consequences”. This would mean “a much higher risk for Israeli territory”, due to the foreseeable damage to infrastructure, the remobilization of reservists and the vagueness in which evacuees would be left. This all adds up to a lot of money. So much so that the Ministry of Finance estimates that instead of growing by 1.6%, it would decrease by 1.5% this year if this war broke out.

However, Netanyahu downplayed this information. The former finance minister, aware of the importance of Israel’s international image, took the unusual step of issuing a statement in Sabbath to underline the “strength” of the national economy. “Downgrading has nothing to do with the economy. It’s only because we are at war. It will rise again as soon as we win it. And we will win it,” he said.

Far-right Finance Minister Bezalel Smotrich struck a different tone. He described Moody’s document as a “political manifesto” lacking “serious economic arguments” and based on a “pessimistic and absurd geopolitical vision that shows a lack of confidence in Israel’s security and national strength.” He also complained that he did not use the term terrorist organizations when discussing Hamas and Hezbollah.

High technology

Erez Maggor, a professor in the sociology department at Ben-Gurion University of the Negev and a doctor from New York who specializes in the political economy of Israeli innovation, believes that those who will suffer the most from credit rating downgrades are high technology, already punished by the instability generated by judicial reform. “It is a sector which depends much more on foreign investments, which are attentive to what the rating agencies say,” he underlines on the telephone. Israel only began to attract it significantly twenty years ago, so it was not a problem in previous major wars, he adds.

High technology contributes to more than 10% of employment, about 15% of GDP, 25% of income tax collections and half of exports. So he’ll get a huge amount of public money, but that’s just one problem Moody’s mentions. The public deficit, which already reached 4.8% of GDP in January, should end the year at 6.6% (it was supposed to be 2.5%). Parliament has just approved in first reading the draft budget for 2024, which includes an additional spending envelope for the war of 584 billion shekels (148 billion euros).

Ori Greenfeld, chief economist and strategist at investment firm Psagot, also predicted this Sunday on Kan national public television that the Bank of Israel would reverse the interest rate cut it had initiated. While the American Federal Reserve and the European Central Bank have not yet dared to reverse the trend, last January the Bank of Israel became the first in the world to lower its rates (from 4.50% to 4.50% at 25%), after having raised them since 2020.

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