Treasury, IMF Confident Israel Will Weather War

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The empty arrival lounge of Ben Gurion International airport, near Tel Aviv, is seen following several flight cancellations on July 23, 2014 due to the ongoing the Gaza bloodshed.Credit: AFP

Government and financial-market sources, backed by the International Monetary Fund, remained confident that Israel’s economy will bounce back quickly from the fighting in the Gaza Strip, notwithstanding the brief panic set off by foreign carriers’ temporary suspension of air travel to and from Israel this week.

Operation Protective Edge was launched at a time when the government’s finances were unusually robust, Finance Ministry officials who asked not to be named told TheMarker.

The budget deficit in the first half of the year was running at 2.5% of gross domestic product, well under the 2.8% targeted in the 2014 budget. That means the state could spend about 3 billion shekels ($880 million) on the war effort without having to cut spending elsewhere and still meet its deficit target.

“Even with a deficit of 3%, we wouldn’t have any problems,” said one official.

Treasury officials pointed to a successful government bond issue this week that raised 1.1 billion shekels; the 10-year bonds were oversubscribed 2.5 times.

That assessment was backed by Ori Greenfield, chief economist at the Psagot investment house. He said he saw a silver lining in a possible spike in deficit spending, in the form of a boost to an economy that had begun to drag in the months before Operation Protective Edge.

“It appears that the cost of the operation in Gaza have already been incorporated into the budget so the treasury is having no trouble raising money,” Greenfield said, adding, “Even if the deficit ceiling were to be raised to 3.5% of GDP for two years, nothing would happen.”

The IMF said on Thursday that it expected the Israeli economy to recovery quickly from the fighting but warned that the Gaza Strip would require substantial donor aid for reconstruction.

The fiscal cost to Israel of the war so far is estimated at 0.2% of GDP, though that could rise if the fighting continues for long, IMF deputy spokesman William Murray said Thursday, citing figures from “various sources.”

He said Israel’s economy, especially the tourism industry and small- and medium-sized firms, has also been hit, and GDP growth could slow further if the conflict continues. “However, we need to make clear that once the conflict ends, we expect growth in Israel to rebound relatively quickly,” Murray said.

He added that without donor aid, Palestinian authorities would not be able to afford to rebuild infrastructure and buildings after the conflict ends.

“Heavy damage to buildings, water and electricity infrastructure is already apparent, aggravating an already critical humanitarian situation [in the Gaza Strip],” Murray said.

“Absent additional donor financing, the Palestinian Authority does not have fiscal room to take on this additional burden (of reconstruction).”

Meanwhile, the Manufacturers Association of Israel reported Thursday combined losses to Israel industry over the first 16 days of Operation Protective Edge had climbed to 685 million shekels.

The professional organization said the losses amounted to 275 million shekels in the south, which although it has been hardest by rockets fired from Gaza has less industry than central Israel, and 340 million shekels for the center of the country as far north as Haifa.

The estimates were based on a survey of 100 manufacturers that took into account lost production, raw materials that have gone to waste and reduced productivity. The survey found that employee absenteeism due to the war was relatively low.

Overall, 89% of all factory workers were reporting to their jobs — 80% in the south, 90% in the center and 95% in the Jerusalem area.

A proposal by the association to give a blanket exemption from antitrust rules to small- and medium-sized factories during Operation Protective Edge was rejected out of hand by regulators on Thursday. But the antitrust commission said it would consider individual requests.

Small- and medium-sized firms have been the hardest-hit by the fighting.

On Thursday, the cabinet approved in a special session a package of measures aimed at easing the economic burden of the hostilities.

Ministers approved moving up to the beginning of August Israelis called up for emergency reserve duty and cleared the National Insurance Institute to accept applications to pay some earlier than that.

An interministerial committee headed by Tourism Ministry Director General Amir Levy is to develop a special program to aid tourism. The sector has been among those most hurt by the war, as foreign tourists have cancelled reservations during the peak season of what had been shaping up to be a record tourism year.

With reporting from Reuters.

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