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23 Nov, 2023 13:51

Israel’s war debt forecast to balloon

The government’s budget deficit is expected to widen to around 9% of GDP, according to the Finance Ministry
Israel’s war debt forecast to balloon

Military costs are forcing the Israeli government to turn to debt for financing, with the country raising 18.7 billion shekels (over $5 billion) from local bonds since the start of the conflict with Palestinian militant group Hamas.

According to a Bloomberg report on Thursday, citing the Finance Ministry, the conflict is costing the Israeli economy around $270 million every day. Tel Aviv-based financial advisory powerhouse Leader Capital Markets has estimated that the overall fiscal price tag for 2023-2024 will be $48 billion.

Israel will likely be “on the hook for two-thirds of the total costs,” Leader reportedly said, adding that the US will pay for the rest.

The report indicated that the Israeli government has issued international debt in yen, euros, and US dollars through private placements via Wall Street banks such as Goldman Sachs.

“We are moving forward with a base case scenario that references several months of combat and have worked in additional buffers,” Yali Rothenberg, the Finance Ministry’s accountant general, told the news agency. “We are well capable of financing the State of Israel even in more extreme scenarios than the current fighting.” 

The Israeli government has significantly increased expenses to fund the military and other conflict-related issues. This has led to a record budget deficit, which last month ballooned to $6 billion, a more than sevenfold increase compared to one year ago. The budget shortfall now stands at 2.6% of GDP, and Rothenberg said it is reasonable to expect the deficit to be around 9% of the country’s annual economic output over the next two years.

Finance Minister Bezalel Smotrich has put forward an amended budget for the remainder of 2023 with a spending increase of $9.3 billion that will be largely financed by debt.

“Israel will also have to make up for an estimated 15 billion shekels [$4 billion] of lost revenues in 2023 and then next year re-stock a government tax-compensation fund that was emptied of 18 billion shekels [$4.9 billion] to pay for expenses after the war broke out,” Bloomberg wrote.

Israel’s domestic issuance reportedly accounts for over 80% of the total, as it is facing a “less welcoming” market abroad. The cost to insure Israel’s sovereign bonds against a default has roughly doubled since the October 7 Hamas attack, Bloomberg reports.

The government has also reportedly used a US-registered entity affiliated with the Finance Ministry to sell a monthly record of more than $1 billion of bonds. Additionally, it has borrowed abroad through privately negotiated deals, raising a total of $5.4 billion since the start of the conflict.

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