Israel’s Economy In The Fog Of War: Part 2

Read more >>> Israel’s Economy In The Fog Of War: Part 1

Read more >>> Israel’s Economy In The Fog Of War: Part 3

Photo by Lior on Unsplash

The hallmark of the Israeli economy during these past two years of war is that it is highly resilient, able to both finance its military operations while continuing to expand the economy.This week the Tel Aviv stock exchange hit  an historic high, as investors looked beyond the current hostilties to greater business opportunities for Israel in the region. An indication of investor confidence, the Shekel fell to 3.02 per USD.  The economy continues to generate trade surpluses and attract funds from abroad to support its hi-tech and R&D facilties.

Opportunity costs

Nonetheless, wars are costly, and the degree of resilience is always being put to the test. The Israeli Finance ministry put out a set of indicators to judge the impact of the war. To  begin, we are talking about an “ air war” and no troop involvement. Under the current limited restrictions, e.g. school closures, workplace restrictions,the weekly cost is estimated at $ 1.4 billion. This is not a hard and fast number, but a reasonable estimate of the reduction in economic activity that the economy will go through while the hostilities continue. Schools will operate by Zoom, the same for those in the hi-tech sector, while other operations will be forced to close. So, these estimates are borne out of speculation more than anything else.  Anyways, overall, this is a loss of output that is not damaging in the near term.

Defense costs 

The government issued an immediate supplement to the 2026 defense budget of an additional $2.9 billion for the current operation. Keep in mind that these estimates are based upon the fighting to last  “some weeks”. If the war expands into a prolonged regional conflict, these costs will undoubtedly rise. 

Financing

Israel has had to turn to the capital markets to support its war effort.  In March the Government Debt Management Unit issued $ 5.5 billion in tradable bonds. Nonetheless, Israel’s financial condition remain relatively strong, to wit:

• Deficit projects for 2026 moved up slightly from 3.9% of GDP to 4%,

• Debt-to-GDP is now at 68%, 

• The yield on its 10-year bond is 3.77%

• The credit rating remains “ stable” provided no ground war.

• Risk premium demanded by bond holders remain unchanged

The  Bank of Israel set its rate at 4% on Feb. 23 and since has adopted a wait and see approach regarding the need to intervene to support the economy.  

In sum, the impact of the war, as best one can determine now, should not be a  burden. The country is used to carrying on business in imaginative ways while sirens alert the population to head for shelters. The international financial markets have absorbed the additional Israel debt without a higher risk premium..