Repercussions of ongoing Israel’s war on Gaza catch up with its economy

Israel’s war on Gaza may cause it to sell a near-record amount of bonds this year to continue funding its deadly attacks on Palestinian civilians. Bloomberg reported citing several finance ministry officials with knowledge of the matter.

On Friday, the task became more difficult as Israel’s credit rating was downgraded for the first time ever.

Moody’s Investors Service downgraded the government to an A2 rating. Even though Israel is currently comparable to countries like Iceland and Poland and remains well within investment-grade territory, the move highlighted the financial toll its war on Gaza is having on the country.

According to the unnamed financial officials, the Israeli government is expected to rely significantly on shekel debt markets as it increases its issuance. Yet, it also intends to sell more foreign-currency bonds, particularly through agreements reached through private negotiations.

Following the week’s end of trading, Moody’s said that the war would “materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength.” “Israel will have a materially larger debt load than anticipated prior to the conflict.”

Israel is headed for one of its biggest budget deficits this century as the costs rise. According to officials, the government plans to issue more debt in 2024 than it did in any previous year save 2020 when it had to borrow and spend excessively to deal with the consequences of the coronavirus pandemic and lockdowns.

Private sector analysts agree. The chief economist at Meitav DS Investments, Alex Zabezhinsky, estimates that the total amount of debt issuance will be approximately 210 billion shekels ($58 billion), a nearly a third increase from the previous year. It came to 265 billion shekels in 2020.

The domestic market, which typically authorities rely on for about 80 per cent of their financing needs, will be impacted the most.

This is a strategy that targets the nearly 3 trillion shekels of savings managed by Israeli pension funds and other major institutional investors. That should be sufficient to guarantee that Israel’s borrowing costs remain stable, at least for the next six months or more, according to EFG Asset Management’s chief investment officer in London, Mozamil Afzal.