ISRAEL AT WAR
Gaza war will cost Israel economy over $17 billion
Meitav Investments House estimates that the costs of the war with Hamas will be double the cost of the Second Lebanon War, compensation for all those affected to reach NIS 17 billion ($4.18 billion), and tax revenue loss of NIS 31 billion ($7.1 billion)
Israel’s war against Hamas is expected to cost over NIS 70 billion ($17.2 billion), about 3.5% of GDP, according to the chief economist of Meitav Investments House, Alex Zabezhinsky. He divides the damages into four categories: the direct cost of the war, compensation for property damage, economic assistance (business continuity, household support), and loss of state income due to economic disruption. This estimate is higher than that of the Bank of Israel and the Treasury, which unofficially have estimated that the impact will be a loss of 2-3% GDP.
According to Meitav's estimates, the war is expected to last about 60 days and will be costlier than any other recent conflict. Its direct cost will be approximately 25 billion NIS ($6.17 billion) including ammunition and mobilization of reservists, and will be double the cost of the Second Lebanon War. Meitav estimates that compensation for all those affected (individuals and businesses) could reach 17 billion NIS ($4.2 billion), and a loss of tax income due to a GDP reduction of 31 billion NIS ($7.6 billion). Meitav calculates that the loss of tax-based state revenues will translate to about a 1.5% GDP loss, or about 28 billion NIS ($6.9 billion).
Additionally, Meitav suggests that by the end of 2023, the deficit will rise to 3% of GDP, compared to the pre-war forecast of about 1.5%. As a result of the expected increase in the deficit, gross borrowing may rise by approximately 50 billion NIS ($12.3 billion) by the end of the year, assuming that the Ministry of Finance uses about 10 billion NIS ($2.4 billion) from cash reserves.
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"It is likely that they will try to reduce the scope of borrowing by cutting budget expenditures, such as freezing coalition funds, but they will still need to raise about 37 billion NIS ($9.1 billion) in the last two months. The market will find it challenging to absorb such high amounts,” says Zabezhinsky.
He estimates that the Ministry of Finance will borrow lower amounts in 2023, and the rest will be included in what they borrow in the following year. Meitav points out that the Bank of Israel Act allows the ministry to request assistance (a bridging loan) from the Bank of Israel in the amount of about 10 billion NIS ($2.4 billion) for five months.
The picture is more complex for 2024. There is expected to be a GDP deficit of 4% compared to a pre-war forecast of 2.5%, which would require the finance ministry to maintain a monthly borrowing pace of about 12 billion NIS ($2.9 billion) in the local bond market, in addition to raising about 25 billion NIS ($6.1 billion) in foreign markets.
According to Meitav's estimates, by the end of 2024, the debt-GDP ratio will grow to about 62%, compared to about 59% today. All of this is against the backdrop of an expected decrease in economic growth to 2.8% this year and to 2% in 2024.
