Year of war creates cracks in Israel borrowing strength

Israel s economy is facing significant strain due to the prolonged war, with rising borrowing costs threatening its financial stability. The war in Gaza has already cost Israel around 100 billion shekel ($26.3 billion) in direct funding through August, with the Bank of Israel projecting a potential increase to 250 billion shekel by the end of 2025. This escalation, including Israel s incursion into Lebanon, has led to credit rating downgrades and a near-record high in the cost of insuring Israel s debt against default. The war s financial impact is evident in the country s worsening sovereign debt metrics, with the debt-to-GDP ratio reaching 67% and the government deficit surging to 8.3% of GDP. Despite the robust domestic market and international investors familiarity with Israel s credit, there is a growing concern over the environmental, social, and governance (ESG) implications of the war, leading to a narrowed investor base and increased interest in offloading bonds. The war has also affected foreign investment, with a 29% drop in 2023 and a decline in global funds ownership of Israeli stocks to its lowest in a decade. The government has responded by pledging $160 million to boost venture capital funding for the tech sector, which accounts for 20% of the economy. However, the war s unpredictable impact on foreign direct investment remains a concern. The economic pressure from the war has hindered Israel s agriculture and construction sectors, with the latter being a key factor in the 20% plunge in economic growth in the fourth quarter of the previous year. Despite these challenges, Israel has managed to raise funds through international capital markets and its diaspora bond vehicle, targeting a second annual record haul above $2.7 billion. In summary, Israel s economy is grappling with the financial consequences of the ongoing war, with rising borrowing costs, credit rating downgrades, and a narrowed investor base posing significant challenges. The government s efforts to support local investment and consolid

Source: thehindu.com
Published on 2024-10-07

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