‘State of War’ & Israel’s Economy

Israel is officially “at war” and a sense of Déjà vu has engulfed the country. As Jewish people celebrated the festivities of Simchat Torah, an important Jewish Holiday, the Palestinian militant group – Hamas carried out an unprecedented surprise attack on Israeli territory, reminiscent of the 1973 Yom Kippur war. Thousands of rockets were being fired into Israel from the Gaza strip and dramatic images of Hamas militants infiltrating Israeli territory via land, air and sea using “pickup trucks, paragliders, and speed boats on the coast” started surfacing. HAMAS – an acronym for an Arabic phrase meaning ‘Islamic Resistance Movement’ was founded in 1987 by Sheik Ahmed Yassin – a member of Muslim Brotherhood and has been at war with the Jewish state ever since. After the parliamentary elections of 2007, Hamas seized control over the Gaza strip (which was formerly under the jurisdiction of Israel). Gaza has been a hot-spot of Iran-backed violence against the state of Israel and the two sides have fought four wars since then.

Even though both Israelis and Palestinians are accustomed to conflict and ethnic violence, the latest attack is unparalleled in Israel’s recent history. Hamas gunmen stormed up to “22 locations beyond the Gaza Strip… up to 24 kms” inside Israel. So far, at least 600 Israelis have died so far, and approximately 2,000 have been wounded, including foreign nationals. The Iran-backed militant fgroup has also taken an unknown number of civilians and soldiers including senior military officers as hostages. In a statement, Hamas commander said that it launched attacks on the Israeli territory ‘in defense of Al-Aqsa (mosque)’ which was stormed by Israeli settlers a few days ago. However, in all likelihood, Hamas planned this offensive for many months, with “support from Iran”, as Hamas spokesperson Ghazi Hamad admitted. Given that Israel’s surveillance of Gaza is intense, it is a mystery why Israeli intelligence agencies failed to intercept such a massive attack. Some experts link Hamas’ attack to current U.S.-brokered talks on normalisation of ties between Israel and Saudi Arabia; a move that had deeply disturbed Iran. As strategic pundits are trying to make sense of this major intelligence and military failure, Israel’s politico-military leadership has launched an intensive Operation ‘Iron Swords’ to avenge the attacks.

Source: The road from Jerusalem to Dead Sea. Clicked by Author in 2022

The ongoing violence comes at a difficult time for Israel, which is dealing with the greatest protests in its history in response to Prime Minister Netanyahu’s unpopular judicial reforms. In February this year, opinion polls by Israel Democracy Institute and Jewish People Policy Institute had predicted that prolonged political protests, if unchecked, may spiral into violence, and fringe elements may take advantage of this turmoil. Eight months later, the prediction has come true and a major casualty of this long-drawn conflict would be Israel’s economy.

In aftermath of Hamas attack, shares on the Tel Aviv Stock Exchange registered a steep decline. The benchmark TA-125 index and TA-90 index used to measure top-90 stocks with the highest market value fell by more than 6% on Sunday. The blue-chip TA-35 derivatives stock index also plummeted by over 6 percent, marking its worst slump in over three years. The TA-Bank index of the five largest banks fell by approx. 8%, while firms in insurance and construction also registered a drop of 8-9%. However, what happens in Israel does not stay in Israel. The Jewish state’s relations with its Arab neighbours have been tense and complicated, and despite some degree of diplomatic and political normalcy between Israel and some of its Arab neighbours over the last one decade, there is a sense of insecurity among regional players. Thus, due to heightened geopolitical risk and a threat of regional escalation, negative market sentiment reverberated across the region. Egypt’s EGX30 index slid down by 5.4%, Saudi Arabia’s Tadawul All Share Index dropped by 1.2% and stocks in Kuwait, Jordan, Bahrain, and Qatar have also weakened.

The war is likely to worsen the economic situation in Israel, which was already dealing with economic side-effects of political protests which compelled several foreign investors to pull their money and assets out of Israel and relocate them to the United States and Europe. The recent edition of Consumer Confidence Index (an indicator used to gauge market optimism and investor sentiment) published by Israel’s Central Bureau of Statistics also showed a decline in investor confidence over last few months. There has been close to 80% reduction in investments in Israel’s high technology and start-up sector since then. Israel is known as a startup nation and the fin-tech industry is one of the most important drivers of Israeli economy. According to a study by Israeli private equity investment firm Viola, Israel has been demoted from fifth best-funded tech ecosystem in the world to tenth position. Israel’s currency dropped to a seven-year-low last month and its GDP growth rate tumbled from 6.5% in 2021-22 to 3% this year.

Although the Bank of Israel has stated that it is too early to quantify the likely extent of economic damage due to the ongoing fighting, the gloomy pre-war economic scenario would get worse in the aftermath of the ongoing war. Taking cues from the history, the 50-day war with Hamas militants in 2014 resulted in a loss of 3.5 billion shekels, or 0.3% of GDP as per Bank of Israel estimates. A similar fall in GDP can be extrapolated, subject to nature and duration of conflict. It is also logical to assume that the current wave of instability is likely to further induce capital flight resulting in notable reduction in volume of domestic and foreign investments in both private and public sectors. Ori Greenfeld, chief strategist at Israel’s Psagot Investment House stated that a prolonged war with Gaza will adversely affect many important macro-economic variables including the domestic consumption levels, and tourism and hospitality sector are likely to be most severely affected.

Even though Israel economy has thrived under conflict in the past, recovery from this surprise attack amidst ongoing political instability is likely to be slow, sore and painful.