The large-scale missile attack against Israel this morning in response to the targeted killing of an Islamic Jihad leader in the Gaza Strip has thus far had only an extremely limited effect on the economy at the macro level. This is evident in the moderate response this morning by the markets to the event, with minor losses on the stock market and a slight weakening of the Israeli currency in the shekel-dollar and shekel-euro exchange rates.
Most of the damage to economic activity in southern and central Israel resulted from instructions by the Home Front Command to leave children at home and to partially shut down workplaces. The economy loses NIS 2.5 billion in GDP for every day of a complete shutdown, such as an election day, so the loss in in GDP this morning is likely to amount to several hundred million shekels, not counting the damage to tourism caused by cancellations of planned visits to Israel and a decline in reservations.
In economic stability and the global perception of the Israeli economy, it is still too early to talk about a change for the worse. The credit rating agencies, which usually cite a worsening in the security situation as one of the two main risk factors for Israel's credit rating, will be in no hurry to reassess Israel's credit rating on the basis of a single day, or even a few days of fighting. The credit rating agencies have confidence in the Israeli economy's ability to withstand limited and short-term security events.
The chief economists of investment houses share this view, but this morning's events nevertheless aroused some hesitation, given the extent of the damage to economic activity, which was more serious than in past events.
Psagot Ofek chief economist Ori Greenfeld wrote, "As can be seen in the opening of trading, and in accordance with what we have learned in recent years, Tel Aviv Stock Exchange investors are not too shaken by the security events."
Greenfeld added, "Ostensibly, it can be said that this response by the markets is logical, because events in recent years had no substantial influence on the economy and companies, so the effect on the capital markets is limited. At the same time, it is important to note that given the fact that today's events are clearly affecting economic activity in central Israel, the effect greatly depends on the duration of the event. If the event is confined to a few days, its effect will not be substantial, because a large proportion of companies will later "make up for" the missing days. On the other hand, a prolonged event that paralyzes production and consumer activity for a long time will eventually be reflected in company profits, and is liable to cause damage to investors."
Meitav Dash chief economist Alex Zabezhinsky wrote, "Experience in the past decades indicates that an increase in security tension for limited and relatively short period, even up to a month, does not affect economic activity in the long term. Even if we have experienced a drop in activity in a given quarter during times of major operations in the Gaza Strip, we saw this damage almost completely offset in the following quarter, except for the tourist industry. The markets have also already learned this, and their response to security events of this type is usually on a small scale."
IBI Investment House chief economist Rafael Gozlan cites the partial shutdown of economic activity in central Israel as a "change" in comparison with previous rounds of fighting. He says that the relatively high budget deficit constitutes a "poor starting point" for Israel in a scenario in which it will have to substantially increase the defense budget.
"Rounds of fighting and defense escalation are nothing new," Gozlan writes. "They unfortunately constitute part of Israel's situation. The domestic economy and capital markets have experience with security escalation, which usually has a minor and short-term effect on economic activity, except for the local tourist industry, in which the potential damage is greater. If it is nevertheless necessary to point to a difference in the current episode, such an extensive shutdown of activity did not occur in the past, and there is also ongoing tension with Iran."
Gozlan adds, "The security deterioration is highlighting the importance of the economy's financial resilience, with stands out especially in the balance of payments, foreign currency reserves, and the decrease in the ratio of debt to GDP until recently. On the other hand, the failure to deal with the continuing rise in the deficit over the past year is a negative factor that stands out in view of these events, because a high budget deficit constitutes a weak starting point for a scenario of another increase in defense spending, when budget major adjustments are already required in the coming year."
Another factor of increasing weight is the global macroeconomic situation, because as long as the situation is reasonably good, it makes it easier to cope with security escalation. On the other hand, if the global economic situation deteriorates in tandem with the local security situation, the Israel economy will face a major challenge. If we examine pricing in the local market, including the foreign exchange market, it indicates little likelihood of this happening."
Published by Globes, Israel business news - en.globes.co.il - on November 12, 2019
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