The Israeli economy has been facing many obstacles and difficulties over a year due to the war that Tel Aviv continues to wage on the Gaza Strip, including the rise in borrowing costs that have begun to impose increasing pressure on the financial structure of Israel.
The Ministry of Finance data indicates that the direct cost of financing the war in the Gaza Strip is:
- It reached 100 billion shekels ($26.4 billion) last August.
- The Bank of Israel estimates that the total cost could rise to NIS 250 billion ($66 billion) by the end of 2025.
But this estimate was made before Israel’s military invasion of Lebanon to confront Hezbollah, or the calculation of a confrontation with Iran, which would increase the total cost.
This has led to a downgrade of Israel’s credit rating, exacerbating economic impacts that could last for years. At the same time, the cost of insuring Israel against defaulting on its debt has reached its highest level in 12 years, and the budget deficit has widened.
According to Reuters “As long as the war continues, sovereign debt metrics will continue to deteriorate,” said Sergey Dergachev, portfolio manager at Union Investment.
Although Israel’s debt-to-GDP ratio – a key measure of economic health – stood at 62% last year, borrowing needs have ballooned.
“Even if Israel had entered the war in a relatively good economic position, it would have been painful financially, and over time would have put pressure on the credit rating,” Dergachev explained.
Israel’s hardline finance minister, Bezalel Smotrich, who advocates continuing the war, says his country’s economy is strong and its credit rating is expected to rise once the war ends.
The costs of the Israeli war are high because:
- Iron Dome air defenses.
- Large-scale mobilization of forces.
- Intensive bombing campaigns.
The Iron Dome defense system costs approximately $50 million per battery. Each interception ranges from $100,000 to $150,000. Despite the high costs, it remains a crucial investment for protecting against missile threats.
Israel’s bombing campaigns are costly, with each airstrike ranging from $20,000 to over $100,000. Large-scale operations can escalate expenses into billions, heavily impacting the defense budget.
This year, the debt-to-GDP ratio reached 67%, while the government deficit recorded 8.3% of GDP, much higher than the previously expected 6.6%.
Although the primary buyers of Israeli international bonds, pension funds, or large asset managers lured by relatively high sovereign debt ratings, are unlikely to dump these assets in the short term, the investor base has shrunk.
Investors say privately that there is a growing desire to dump or not buy Israeli bonds because of concerns about the environmental, social, and governance implications of how the war is being conducted.
