Risk Assessment for Financial Institutions in Israel Amid Ongoing War with Gaza

The Impact of the War on the Economy

The Israeli economy is expected to post subdued growth in 2024 due to the ongoing war with Hamas, which has been raging since October 7, 2023. The conflict has resulted in thousands of casualties and a significant economic slowdown, with businesses forced to close and consumers reducing their spending.

• Direct impact: The direct impact of the war peaked in the last quarter of 2023.
• Indirect effects: However, its indirect effects will continue to weigh on the economy throughout 2024, including:
  • Higher security concerns
  • Increased military spending
  • Potential increase in public sector wages and social spending to support affected households and sectors

Political Risks for Israel

The war has also heightened political risks for Israel, with tensions between Israel and the Arab world deepening. The conflict has led to a deterioration in relations with Turkey, which has taken a harsh stance against Israel’s actions in Gaza, and may impact diplomatic cooperation on eastern Mediterranean gas operations and exports.

Fiscal Risks

Financial analysts warn that the ongoing conflict poses significant risks to Israel’s fiscal position, with the war expected to cost the country $58 billion. The government’s low-taxation and high-social-spending approach will likely push the fiscal deficit wider in 2024, while higher interest rate payments and subdued growth performance will also contribute to the deficit.

Conclusion

Despite these risks, Israel’s robust external position, with international reserves standing at $199 billion (38% of GDP), will continue to ensure its financial stability. However, the ongoing war and political tensions pose significant challenges for Israeli financial institutions and policymakers, who must navigate a complex and uncertain economic landscape.