Thomas White Global Investing
Israel
Israel  Stamp
January 9, 2009
A Postcard from the Middle East
Israel : Economy under Fire

War has devastated the economy of the Gaza Strip

The spoils of war. Unemployment runs at 49% in Gaza and about 80% of the population lives on less than $2.30 a day.

The small ribbon of land that is the Gaza Strip has long been under contention. But on December 28, Israel began a series of airstrikes in what is now one of the deadliest conflicts in the history of the Gaza Strip. The ongoing conflict between Israel and the ruling Palestinian militant group Hamas escalated, triggering the sudden attack. Lost in the narrow vision of war is the average Gazan who depends on Israel for food, jobs and medical needs. The last of Gaza’s lifelines were severed when the bombing raids destroyed the warren of tunnels bordering Egypt which Hamas had designed for smuggling arms. But these passages also supplied basic rations for the people of Gaza, like flour, fuel and baby food.

Gaza’s population of 1.48 million is well used to coming up short on supplies, ever since the 2007 takeover of the small strip of land by Hamas. This prompted Israel and Egypt to place severe restrictions on access of goods and people to and from Gaza. The latest battle has resulted in the inability to import raw materials and export products and the closure of most of Gaza’s 3,900 factories. Construction has halted and the jobless numbers have skyrocketed, deepening poverty in an area where most of the residents rely on U.N. aid to survive. Due to shortages, inflation has escalated – a 110 pound bag of flour now costs $100 while previously it was just $30.

But it’s not just the Gaza Strip that has been affected. Israel is groaning under the burden of the extra military spending, which is estimated to be anywhere between $25 million to $50 million a day. Already, exports of key products like diamonds have slipped 24.5% in 2008. Plant closures have so far been limited to non-essential facilities within 2.8 miles of the Gaza border, but soon areas farther in may be affected, impacting several multi-national companies. A manufacturers’ trade association in Israel estimates the current loss of production at $1 million a day. Jittery markets around the world drove up oil prices by nearly 12% on December 29, and by January 6, 2009 the price of oil shot up to more than $48 per barrel.

So far, Israel’s financial markets have been relatively resilient to the hostility. But the real test for Israel’s markets will be the impact of the military operation on the budget deficit. With continuing warfare, the country may have to dig into the coffers of its reserves, which could have a negative effect on the stock market and on the shekel. With a sharp decline in tax revenues and the fallout of the global slowdown, Israel’s budget deficit in 2009, even without the new conflict, was projected to be at least 5% of the GDP, up from an expected 1.6% in 2008.

Both Gaza and Israel have suffered heavy losses in terms of casualties and emotional scarring. But it’s their economies that have borne the biggest brunt, reeling under the expensive military operation being staged. Yet, in today’s interconnected world, a conflict on one side of the world affects us all. And especially in the Middle East, which holds the world’s treasure trove of oil, the stakes are high. The next question is not if this conflict will affect global economies but when.

 

Image Credit: David Berkowitz under a Creative Commons License

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