The war with the Hamas terror group is costing Israel at least NIS 1 billion ($269 million) per day and is poised to take a bigger toll on the country’s economy than previous conflicts, according to a report by global ratings agency Moody’s based on an initial estimate by the Finance Ministry.
“The severity of any damage to the economy will depend — to an important extent — on the length of the military conflict but also on the longer-term prospects for Israel’s domestic security situation,” Kathrin Muehlbronner, senior vice president at Moody’s, said in a report released late on Monday. “While the uncertainty remains very high, we believe that the impact on the economy could be more severe than in earlier episodes of military conflict and violence.”
The total cost of the war is estimated to have a price tag of as much as NIS 150 billion to NIS 200 billion, equal to up to around 10 percent of gross domestic product, according to recent report by the Institute for National Security Studies (INSS), cited by Moody’s, which last month put the Israeli government’s A1 credit ratings on review for downgrade.
This financial burden would be significantly higher than that of previous operations such as Protective Edge in 2014 or the Second Lebanon War in 2006, which lasted 34 days and incurred a direct cost of around NIS 9.5 billion or 1.3% of GDP, according to Moody’s.
The government’s spending will include billions of shekels on defense for the continued war effort; absorbing wages of the hundreds of thousands of drafted reservists; funding compensation for war-affected businesses; and the reconstruction and rehabilitation of communities devastated in the October 7 Hamas terror onslaught. Meanwhile, fiscal revenues — mainly tax income — are expected to continue to slump as consumption, among other demand factors, is declining.
Estimates of the economic impact of the war prompted Moody’s to lower its growth forecast for the Israeli economy for this year to 2.4% from 3% previously. In a more pessimistic outlook for 2024, the ratings agency said it projects a contraction of around 1.5% followed by very moderate growth in 2025.
Credit ratings agency Standard & Poor’s said last week that it sees Israel’s economy contracting 5% in the fourth quarter of this year. S&P forecasts that the economy will expand 1.5% in 2023 and 0.5% in 2024, followed by faster growth of 5% in 2025.
“While the economy has coped well with shocks over the past two decades, the current military conflict will test Israel’s economic resiliency,” Muehlbronner noted.
More than 200,000 people have been displaced from communities along the southern and northern borders in the aftermath of the October 7 atrocities perpetrated by Hamas, which killed about 1,200 people, a majority of them civilians, and saw some 240 taken hostage.
Israel is vowing to eradicate the Iran-backed Hamas regime in the Gaza Strip and bring back the hostages, and has been targeting all areas where the group operates, while seeking to minimize civilian casualties.
The Israeli army has called up around 350,000 reservists, which is disrupting the operations of thousands of businesses across the country.
The absence of 18% of the country’s workforce — those drafted into the army, those evacuated from their homes near the borders, and parents caring for children as schools are only partly functioning — is already putting a strain on the operations of manufacturing industries and the tech sector, Moody’s cautioned.
The Israeli economy’s dependence on the tech sector has significantly grown in the past decade, and it now contributes 18% of GDP, in contrast to less than 10% in the US and about 6% in the EU. About 14% of all employees work in the tech sector and in tech jobs in other sectors. The Israeli economy relies on high-tech products and exports, which make up about 50% of total exports, as well as taxes from the sector.
“While the high-tech industry is far more diversified now, the conflict comes at a difficult time for the high-tech industry globally, and Israel has seen significantly lower capital inflows and fund-raising activities this year compared with the last two years,” said Muehlbronner.
The large civil and defense costs of the war, including the package of financial aid for affected businesses, which is estimated to cost around 0.8% of GDP up to the end of November, are expected to have a “significant” impact on the government’s public finances, alongside a “significant” decline in tax revenue, Moody’s warned.
The ratings agency now expects the budget deficit to widen to 3% of GDP in 2023 and more than double to around 7% of GDP in 2024. Israel’s fiscal deficit already expanded to 2.6% of GDP in October, from 1.5% in the previous month. In 2022, Israel posted its first budget surplus in 35 years, of 0.6% of GDP.
“Part of the defense-related budgetary cost could be absorbed by redirecting other spending and using the budgetary reserves (typically around 1% of overall spending),” said Muehlbronner. “We do not expect the Israeli government to face any difficulty in funding even substantially higher deficits, given its broad and diverse funding sources and strong support from the Israeli diaspora.”
Since the outbreak of the war, Israel has raised NIS 30 billion in debt, according to Finance Ministry data, out of which NIS 6 billion was dollar-denominated debt raised in international markets.