Israel and its supporters around the world fear that the war with the Palestinian resistance in Gaza will cause chaos throughout the region, with increasing chances that it will continue for an extended period and expand to include other parties, which may lead to worsening economic chaos, in addition to devastating human losses.
Michael Lynch, a professor at Georgetown University in Washington, believes, in an analysis at the US Council on Foreign Relations Institute, that the war will be very costly to the Israeli economy and the trade relations that Israel has built with the countries of the Arab region.
Lynch points out that those urging Israel to invade the Gaza Strip by land are pushing it toward a strategic disaster, which is consistent with the opinion of many military institutions.
In the same regard, Citibank recommends taking short-term positions on the shekel this week, warning that the costs associated with the war may escalate soon, and that the Israeli Central Bank may be forced to cut interest rates sooner than expected.
So far, the Bank of Israel has exhausted a large portion of its $200 billion reserves in support of the declining shekel.
For its part, the Israeli Bank Hapoalim believes that the cost of the military operation in Gaza alone may cost the Israeli treasury about $6.8 billion, but the other economic costs that will affect the Israeli economy and investment confidence in its financial instruments cannot be calculated at the present time, to the point that some international rating agencies postponed the issuance of Classification of the Israeli economy and placed the economy in the negative box.
Israeli losses since the start of the war estimated at tens of billions of dollars.
The Israeli Central Bank has intervened in the exchange market with about $45 billion so far in a failed attempt to prevent the currency from collapsing, and it’s currently confused about the path of sound monetary policy that preserves the balance between growth and Economic and protection of Israeli assets denominated in shekels.
In this regard, an analysis by the American investment company “T. Rowe Price” says that in the wake of Hamas surprise attack, the exchange rate of the shekel against the US dollar sharply declined, exceeding the threshold of 4 shekels per dollar for the first time since 2015.
Sales operations were at the prices of government bonds. Israeli localism is relatively modest.
Experts point out that traders have increased the size of their bets against the Israeli shekel in recent days’ trading, which has increased pressure on the Israeli Central Bank to keep interest rates unchanged and stabilize the currency, despite the cost of the war looming on the economy.
For its part, Fitch placed the Israeli economy under negative rating monitoring.
However, experts believe that the war may raise the risk premium in Israeli financial markets, and investment confidence in the Israeli economy will continue to shake.
Confusion still dominates the Central Bank regarding the monetary policy that can be taken to restore balance to the collapsed shekel in the foreign exchange market.
The Bank of Israel is scheduled to hold a meeting of its monetary policy committee on October 23, to decide on interest rates on its local currency, the shekel.
Due to developments in the war on the Gaza Strip, analysts on the Tel Aviv Stock Exchange expect the bank to reduce interest rates, a decision the bank last took in April 2020 to confront the consequences of the Corona pandemic.
According to Deutsche Bank research, short positions, that is, bets on currency weakness, rose sharply in the week following the Hamas attack, on October 7 to the highest level since January 2022.
The sharp decline in the shekel exchange rate puts the Bank of Israel in trouble.
On the one hand, the Israeli Ministry of Finance is likely to resort to stimulating the economy by lowering borrowing costs in the face of a growth shock, while on the other hand, it will be wary of the repercussions of a weak currency on rising prices of imported goods.
In Israel, up to 360,000 reserve soldiers left their jobs and companies to mobilize for military service, bringing parts of the economy to a standstill.
Israel’s technology industry, the primary engine of growth, suddenly slowed, and production in one of Israel’s main offshore natural gas fields was halted, forcing the Central Bank to allocate billions of dollars to prevent the Israeli currency, the shekel, from collapsing.
The recent escalation represents a difficult phase for the once-prosperous economy, which was recognized by The Economist as the world’s fourth best-performing economy among OECD member states, and Israel’s startup sector has also succeeded in attracting significant foreign investment.
But the economy began to falter this year after a right-wing government led by Prime Minister Benjamin Netanyahu advanced a controversial plan to limit the power of the judiciary, which critics said could weaken the rule of law and incite millions of Israelis to protest in the streets.
Many technology company leaders have threatened to leave the country over the judicial reform, saying it will undermine Israel’s standing and cause its economy to decline.
The recent trends of the Israeli government caused a 60% decline in foreign investment in Israel, and also led to accelerated erosion of the value of the shekel and wide fluctuations in the Israeli stock market, which led to higher interest rates, higher inflation, and increasing expectations of a slowdown in economic growth.
As for the international level, Israeli fears of the Gaza war focus on oil and the future of its prices.
They also focus on Israel’s future plans to integrate its economy into the economies of the region, as well as the loss of the Indo-Gulf Economic Corridor project that Tel Aviv planned to pass through Haifa to Europe.
It’s a corridor that Israel was counting on for its economic expansion globally, and for it to become an intermediary in transporting Arab oil to Europe, thus striking the Suez Canal as an indispensable corridor in global trade, as well as striking the Strait of Hormuz, through which about 17.5 million barrels pass per day.
Analysts don’t rule out that the war against the Gaza Strip will automatically lead to Tel Aviv losing its trade relations with some Arab countries with which it has signed peace treaties.
Experts and observers confirm that Netanyahu’s point of view is that Israel’s security comes from sowing chaos in the Arab region and putting pressure on it economically through international financial institutions, thus impoverishing its people.
However, analysts believe that this war may prove to Tel Aviv the opposite and change a lot in the relations of countries with Israel in the region.
