War on Gaza takes its toll on Israel’s economy

BERLIN (AA) – Israel is likely to be forced to issue bonds at near-record levels again this year. The country borrowed billions of dollars last year to finance its war on Gaza.

International credit rating agencies have drawn attention to the macroeconomic risks facing the Israeli economy in their recent reports.

– Moody’s issues 1st downgrade on Israel’s credit rating –

The US-based bond credit rating agency Moody’s, which had put Israel’s “A1” credit rating on review for a possible downgrade, finally downgraded its rating to “A2” last week, also keeping Israel’s credit rating outlook on negative, signaling further downgrades in the case of continued war.

Moody’s noted in a recent statement that the situation increases the risk of weakening Israel’s executive and legislative institutions, and its financial strength.

It also mentioned that the country’s debt burden will be higher than assumed pre-conflict, as the agency estimates Israel’s public debt to GDP ratio to reach a peak of 67% in 2025.

After the downgrade, Israel is kept in the “investment grade” category, though it has become more difficult to find the funds to finance the attacks.

Meanwhile, the US-based credit rating agency Fitch Ratings placed Israel’s rating, which was at “A+”, on negative due to geopolitical risks caused by the attacks on Palestine.

– Debt deficit estimated to increase further –

The increase in public expenditures due to the war on Gaza caused Israel to run a deficit last year, despite the budget surplus of 0.6% of its GDP in 2022.

Israel has seen a sharp decline in revenues in October, as the country’s budget deficit was at 4.2% of GDP in 2023, though it was at 1.5% in September.

Israel’s 2024 budget, currently awaiting final approval, is estimated to have a fiscal deficit of 6.6% of GDP, and the deficit could climb higher if the conflict escalates.

– Analysts estimate bond issuances to hike –

Israel is faced with high borrowing costs in bond issues due to the risks of the conflict, as it has borrowed billions of dollars through privately negotiated deals since Oct. 7.

The country continues to use borrowing channels to finance its war despite the high costs, and so, it is expected to run a budget deficit close to record levels, according to analysts.

They also said Israel took out high loans during the pandemic to mitigate its effects, adding that the country is expected to borrow again close to pandemic levels in 2024, resulting in Israel’s bond issuance to hike 30% year-on-year.

Analysts stated that if the war on Gaza persists for a few more months, financing from domestic investors may come under pressure, leading to borrowing from international sources at higher interest rates.

– Sales of pro-Israel companies experience negative impact –

The ongoing attacks on Gaza are also adversely affecting the multi-national companies that make public statements of support and send aid to the country.

These companies are the target of boycotts and protests around the world. The sales of such companies, especially the US-based ones, have been affected, and the results are reflected in their balance sheets.

Although the specific impact of boycotting is difficult to verify or quantify, analysts say that investors remain cautious when investing in these companies.

The US-based fast food chain McDonald’s had announced that its branches in Israel would provide free meals to the Israel Defense Forces personnel in the aftermath of Israel’s attacks in Gaza, which was met with criticism, especially by McDonald’s branches in Muslim-majority countries.

The branches in Saudi Arabia, Oman, Kuwait, the United Arab Emirates, Jordan, and Türkiye issued statements to distinguish themselves from the Israeli branch, expressing support for Gaza.

The US coffee chain Starbucks sued its labor union after Starbucks Workers United said “Solidarity with Palestine” on the X platform, which caused many discussions.

Some social media users started boycotting the coffee chain, posting homemade recipes on their accounts as alternatives to the company’s offerings.

Starbucks said it has no political agenda and denied allegations that it is being used to fund government or military operations.

The coffee chain has seen a significant impact on sales in its branches in the Middle East due to the conflict, said Laxman Narasimhan, the CEO of Starbucks, in a conference following the balance sheet announcement.

The consumer reaction in Malaysia was effective, as Donald Jeffrey Meij, the CEO of Domino’s Pizza Enterprises, said in a conference on February 6 that it is commonplace for US companies in Asia, and more so in Malaysia, to be affected by conflicts in the Middle East.