Local institutions have moved $40 billion out of Israel since start of war – report

Institutional investors have moved a whopping NIS 151 billion ($40 billion) outside of Israel since the outbreak of war with the Hamas terror group on October 7, according to a report by Hebrew financial daily Calcalist.

The prolonged war with Hamas and fears over an escalation of the fighting against Hezbollah in the north, alongside a large deficit and slowing economic growth, have led to a diversion of capital to overseas assets by large insurance companies and investment funds, which are responsible for managing the long-term savings of Israelis, including pension and provident funds, Calcalist said in Tuesday’s report.

According to Calcalist, the average exposure to overseas assets — equities, bonds, and non-tradable assets — by local institutions managing provident funds increased from 51.7% at the beginning of October 2023 to 56.3% at the end of July. The average exposure to overseas assets by financial institutions managing pension funds rose from 47.6% at the beginning of October to 50% in July.

Faced with credit ratings downgrades and a widening deficit alongside ballooning military and civilian spending, and as the Hamas war approaches its one-year mark, the government has come under immense pressure to maintain fiscal responsibility and credibility while funding the rising costs of the fighting.

With the outbreak of war in October, local institutions initially increased their exposure to investments in the local market, but in April the trend reversed due to a loss of confidence in the government’s ability to return the economy to future growth, reduce the growing deficit, and bring down inflation, the report found.

Leading economists, former state officials, and central bank governor Amir Yaron have been warning in recent months that the government is not doing enough to mitigate the risk of a looming crisis that could drag Israel’s war-battered economy into a recession and endanger the national security.

Business leaders, investors and market players have been urging policymakers to make responsible spending cuts and implement tax hikes and reforms, in order to forge the path for a recovery and stimulate growth in the economy once the fighting ends.

Analysts say falling confidence in the government’s ability to manage its growing debt could negatively impact investments, mean interest rates stay higher for longer, and make credit costs in the economy more expensive.