Israels defense burden 3 times higher than Western average

Defense expenditure accounted for 8.5% of GDP in 2005, against 8.15% in 2004.

Israels proportion of defense expenditure in terms of GDP was three times higher than that of most countries, according to Ministry of Finance data in a report published by Maalot the Israeli Rating Company. Israels defense expenditure totaled NIS 47 billion in 2005, an increase of 5.5% on 2004. One of the causes was a 19% increase in defense imports which totaled NIS 12.2 billion. While the 1980s saw a sharp fall in the rate of defense expenditure in terms of GDP, the trend changed in 2001 with the outbreak of the second intifada. Defense expenditure accounted for 8.5% of GDP in 2005, against 8.15% in 2004.

Maalot notes that the defense budget is expected to reach NIS 34 billion in 2006, excluding US aid. The US budget proposals will provide for $2.28 billion in aid to Israel, of which $595 million will be earmarked for projects in Israel, without procurements from the US.

The volume of activity of US defense industries is affected directly by the budget for the US Department of Defense, which increased in recent years, as well as the war in Iraq. This caused an increase in US activity, especially in military avionics industries.

The budget of the US Department of Defense is expected to total $442 billion in 2006, of which $78 billion will be spent on the procurement of defense products and $70 billion on R&D activities.

According to Maalots survey of the global market, the US defense market places high barriers to entry by foreign companies. Defense expenditure in Europe has been affected by recession which places limits on the size of budgets. Demand and expenditure in Asia, which is a key market for Israeli defense industries, has been increased as a result of economic growth and tensions between countries in the region.

Israels defense exports totaled $3.5 billion in 2004, 10% of total global defense exports.

Israel Aircraft Industries Ltd. (IAI) was rated 39th in the top 100 sector companies by Defense News. Elbit Systems (Nasdaq: ESLT; TASE: ESLT) was ranked 54th, Rafael Armament Development Authority Ltd. 60th, and Israel Military Industries Ltd. (IMI) 89th. Lockheed-Martin (NYSE: LMT) took top position, followed by Boeing (NYSE: BA) and Northrop Grumman (NYSE: NOC).

Maalot adds that a number of companies have expressed an interest in acquiring Rafael, which is valued at $200-250 million, including IAI, which has been lobbying the government to allow it to also join the bidding.

Published by Globes [online], Israel business news - - on March 30, 2006

Copyright of Globes Publisher Itonut (1983) Ltd. 2006

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