Why Israeli Businesses Need Our Support

Part 1 of the Investing In Israel Series

In 2023, Israeli businesses encountered a dramatic downturn, with acquisitions and public offerings plummeting by 56% to a total of $7.5 billion. This downturn, detailed in PwC Israel’s “exit report” from February, starkly contrasts the record-setting $82 billion in 2021.

The backdrop of war has significantly disrupted daily life, leading to the mobilization of hundreds of thousands of reserve soldiers and the displacement of 200,000 individuals from border regions. Despite Israel’s efforts to minimize civilian casualties with advanced military technology, international focus has remained on the reported 20,000 deaths claimed by Hamas health offices. Israeli forces have uncovered Hamas’s strategy of storing arms under hospitals and schools, a tactic that significantly increases the risk to Palestinian civilians during retaliatory strikes.

Israeli soldiers are seen during a ground operation in the Gaza Strip Credit (AP Photo/Victor R. Caivano)

Israel’s military developments in Gaza have not only led to international criticism but have also isolated Israel on the global stage, affecting its trade and diplomatic relationships. Calls for boycotts and divestments from companies operating in the West Bank have adversely impacted not only Israeli businesses operating globally but also organisations in the West that trade with Israeli businesses. Often Western businesses hugely benefit from utilising Israeli technology that brings significant improvements in their day-to-day operations.

The economic fallout from the war that Israel was forced into in an unprovoked attack from Palestinian terrorists includes delayed or cancelled economic and strategic projects, leading to an anticipated reduction in economic growth to 1.8%, down from the previous year’s 5.6%, as per data from the Israeli Statistical Bureau. Israelis are facing shortages, particularly in agricultural goods like fruits and vegetables, traditionally sourced from the Gaza Strip, with shortages exceeding 75% for some items.

Israel’s Economy Shrinks!

Israel’s economy shrank almost 20 per cent in annualized terms in the final quarter of 2023, official data showed, as it poured resources into its conflict against Hamas in Gaza. The sharp drop in gross domestic product, was far steeper than analysts had forecast. This marked the sharpest contraction since the pandemic with the outbreak of the war, private consumption and investments dropped sharply, while government spending soared amid massive reservist call-ups and wide population displacements

The war’s impact has been felt across various sectors, with tourism and the technology workforce being particularly affected. Moody’s response to these challenges was to downgrade Israel’s credit rating from AA to A-, with a “negative” outlook, highlighting the war’s effect on the government’s financial standing and broader fiscal and political risks.

Economists, including Ronan Menachem from Mizrachi Tefahot, have underscored the importance of addressing these economic challenges, noting that Israel’s debt-to-GDP ratio, although rising, remains comparatively favourable to many other nations.

Labour Shortages and Economic Impact

The government’s decision to restrict West Bank Palestinian workers from entering Israel was security-focused, particularly due to the surge in terrorist activity in Judea and Samaria.  However, this had a significant economic cost, estimated by the Israeli Finance Ministry at around NIS 3 billion ($830 million) per month.

The tech sector, vital to Israel’s economy and known for its young, educated workforce, is now facing a critical shortage of workers due to military service requirements. The impact of this shortage is compounded by the ongoing conflicts with Hamas in Gaza and Hezbollah in Lebanon, further straining Israel’s economic resilience.

The military’s recent troop withdrawals from the Gaza Strip mark a de-escalation from the largest reservist mobilization in Israel’s history, that aims to alleviate the fallout of the labour shortage of workers.

Pro Palestine March in the US. Credit Aveedibya Dey Unsplash

Innovation Nation at Risk

Israel’s global leadership in technology has won claims from prominent world business leaders and investors.  High-profile endorsements of Israel’s tech sector, such as those from the King of England and investor Warren Buffet, underscore its international significance.

Warren Buffett..

“When you go to the Middle East looking for oil, you dont need to stop in Israel. But if you go looking for brains,for energy, for integrity, it’s the only stop you need to make”

However, the sector is now facing significant challenges due to the labor shortages and decreased funding, threatening a broader economic slowdown.

The Israeli Innovation Authority and the OECD have highlighted the war’s expected “temporary but pronounced slowdown” in Israel’s economy, with growth forecasts adjusting downwards from pre-war expectations.

Tourism and Government Spending

The tourism industry has ground to a halt, and government spending has surged to unprecedented levels. The mobilization of 350,000 army reservists has disrupted business operations, leading to cancelled orders and investor hesitancy. The significant evacuation of Israelis from border areas with the Gaza Strip and Lebanon has further demonstrated the war’s domestic impact.

Tel Aviv at night prior to the attack. Credit Yaroslav-Lutsky UnSplash

Economic analyses suggest the conflict is costing Israel approximately $260 million daily, significantly widening the budget deficit and devaluing the shekel. In response, the Bank of Israel has cut interest rates for the first time since the Covid-19 pandemic began.

Investment and Construction Challenges

The high-tech sector has seen a 20% drop in the value of acquisitions, and construction, a major part of the economy, is slowing due to labour shortages. Disruptions in imports, partly due to regional conflicts, are exacerbating these challenges.

The ongoing conflict is anticipated to have significant financial repercussions for Israel, spanning defence expenditures, reconstruction expenses, and sustained economic losses, which are projected to impact the country’s financial performance over the long term. This economic strain is manifesting in reduced activity levels, waning confidence, and diminished investment, particularly affecting vital sectors such as tourism, trade, and the stock market.

Regardless of our religious or secular affiliations, it is imperative now to stand in solidarity with Israel, often hailed as the ‘Innovation Nation,’ the sole thriving democracy in the Middle East. Israel has consistently contributed to global advancements, notably in healthcare and technology across various sectors. Amid escalating anti-Israeli sentiments and sanctions targeting Israeli enterprises, it is paramount to bolster our economic ties through increased trade and investment. As proponents of a secure Jewish democracy amidst a hostile geopolitical landscape, the time has come for us as the supporters of the only real effective democracy in the Middle East, to translate our love for the people and the land into tangible actions.

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Other investment options include Israeli Real Estate,  and the Israeli Real Estate Lawyers

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War Battered Economy – Times of Israel – Sharon Wrobel

About 200,000 Israelis internally displaced amid ongoing Gaza war, tensions in north – Times of Israel – TOI Staff