Israel: Will Economy Beat the Rockets?

As Israel continues to defend itself in Lebanon, countering unprovoked aggression by the terrorist organization Hezbollah, an emerging concern is what effects the war will have on the future of the Israeli economy.

While Israeli Deputy Prime Minister Shimon Peres recently suggested on a trip to Washington, D.C., that Israel may be getting close to making a decision about how much longer to pursue current military operations, stating, "we remain determined in the two senses of determination — to win the war and to win the peace," there are questions about down-the-road economic repercussions.

In a recent telephone interview, Ron Dermer, minister, economic affairs, Embassy of Israel, Washington, addressed that issue. "The first factor to bear in mind is that Israel's economy is strong, with, for example, 6 percent growth so far this year, record foreign investment, decreasing inflation, strong exports, and a budget surplus that will help to absorb any shock the economy might get from this war, so we expect any disruptions to be for the very, very short term," he said.

Still, he conceded, a key is that the conflict ends sooner than later before the economy could be affected too negatively.

Said Dermer: "Because of long-term structural changes, such as just a 1 percent increase in government spending this year and the ongoing move to privatization, fundamentals of the Israeli economy, valued at $130 billion today, are quite strong, so all of the things that have made Israel attractive to investors will stay in place. Fly-by-night investors may run, but serious ones will not be dissuaded."

Foreign investment totaled $11.3 billion from January through May, a 9 percent increase over all of 2005.

One of the areas that will be affected by war is tourism, Dermer confided, but it accounts for less than 2 percent of Israel's economy. But less tourism affects so-called "multiplier effects," he added, such as fewer hotel bookings, and lost business at restaurants and attractions, and for taxis and tour guides.

Business as Usual?
"If this conflict had to happen, it's best that it happen now when the economy can withstand it. Also, it's very localized," said Dermer.

"There are many, many places in Israel where conditions are completely normal."

As reported in the America-Israel Chamber of Commerce Central Atlantic Region's July business newsletter, Israel's Finance Minister Abraham Hirchson has announced that the government plans to work within the budget to maintain economic stability, and that the budget will not be breached since a surplus had been reached by mid-2006.

AICC Executive Director Debbie Buchwald expressed her views: "People were highly optimistic before this, based on this year's growth, but they are pursuing things as if there's nothing going on in Israel — because it's a remarkably resilient country where people will find a way to work.

"So far losses to the economy are the highest since the 1973 Yom Kippur War, the costliest of Israel's wars. That war cost $2.4 billion in 1974 prices. Now, from what could be a war of attrition, losses are expected to be 1 [percent] to 2 percent of Gross Domestic Profit in 2006-07," Buchwald said.

According to economic ministries in Jerusalem, this figure includes loss of investment, private consumption, tourism and manufacturing. Also, the ministries concluded, the government will have to prepare an extensive aid program to revive businesses in the north and replenish the property tax compensation fund.

Good news for the future of Israel's economy is coming from international sources. On July 17, Reuven Kuvent, general manager of Israel's Dun & Bradstreet, a leading international provider of business information for risk management decisions, confirmed, "The Israeli economy is strong and has one of the highest growth rates in the world, so we don't expect the period of the conflict to substantially harm annual growth rates. … The present conflict is taking place during one of the best periods ever in the history of the Israeli economy."

Deutsche Bank analyst Michael Klahr declared on July 12 that "we do not think that there is anything here yet to upset the strong macro story."

At local law firm WolfBlock, attorney David Gitlin, chairman, corporate/securities department and president, AICC, who was in Tel Aviv just two weeks ago, said none of the more than 40 meetings he had scheduled was canceled.

Said Gitlin, "No doubt about it, the North of Israel is suffering. People there are very distressed. Some factories have closed, some businesses, too. One man told of how a Katyusha landed in his parking lot.

"You can't have one-quarter of the country practically paralyzed and not have it affect the economy in the short term. But I continue to be very bullish about the future of Israel's economy as we continue to expand out operations there. I have no long-term concerns for the Israeli economy or investment in it."

Igal Hami, president and CEO, Gil Tours Travel Inc., Philadelphia, sounded optimistic. "How the economy is affected depends on how long the war takes. If it's rather short, then there won't be much of an effect," he said.

"Overall, we have a good feeling about the future. Our business is still strong and while we have lost some, most people have simply postponed their trips."

Also at WolfBlock, attorney Beth Cohen, director of emerging growth services, said, "We are as busy as ever with Israeli companies, with them e-mailing us and planning trips here. Impressions are it's business as usual, as they work through this."