The Israeli shekel has been on a losing streak, experiencing its longest series of losses in 39 years against the dollar. For the 12th session in a row, the shekel declined at the end of yesterday's session.
Reasons for the Decline
An analysis conducted by Bloomberg International News Agency warns that the shekel's decline may continue if there are no solutions to the Israeli war on the Gaza Strip. The ongoing conflict has raised concerns among investors about the possibility of further damage to the economy.
Impact on Currency and Bonds
Despite the Bank of Israel keeping interest rates unchanged, the Israeli currency and bonds continued to decline. In fact, the dollar exchange rate reached its lowest level since December 2014, standing at 4.07 shekels in the morning session on Tuesday.
Escalating Conflict's Effect on the Economy
The dollar exchange rate was at 3.84 shekels just before the outbreak of the "Al-Aqsa Flood" operation by the Palestinian resistance in the Gaza Strip. The ongoing conflict has caused 10-year dollar bonds to fall for eight consecutive days, while credit default swaps have reached their highest level in 2018. Additionally, the benchmark TA-35 stock index has fallen to its lowest level since July 2021.
Human Toll of the Conflict
The Israeli army has been targeting Gaza with intense airstrikes for 18 days, resulting in the destruction of entire neighborhoods. Tragically, about 5,087 Palestinians, including 2,055 children and over 1,119 women, have lost their lives, with approximately 15,000 injured, according to the Ministry of Health in the Gaza Strip.
Investors React
Investors have been exiting exchange-traded funds that track Israeli stocks at an accelerated pace over the past two weeks due to the sharp decline in stock prices. The conflict's expansion to other fronts has further fueled concerns.
The Israeli Budget Deficit
Amid the war on Gaza, the Central Bank of Israel decided to keep interest rates unchanged at 4.75%. The bank acknowledged the economic effects of the ongoing conflict but emphasized that the Israeli economy remains strong, stable, and built on solid foundations.
Economic Outlook
Prior to the war, the Israeli economy boasted a current account surplus, a low debt-to-GDP ratio, high foreign exchange reserves, and declining unemployment. The bank predicts a GDP growth of 2.3% in 2023 and 2.8% in 2024, assuming the war remains focused on the southern front during the last quarter of this year.
Government Budget Deficit
The bank expects the impact on economic activity to increase the government budget deficit, reaching 2.3% of GDP in 2023 and 3.5% of GDP in 2024.
Israel currently holds foreign exchange reserves amounting to $198 billion, which is approximately 40% of its gross domestic product.
Source: Al Jazeera + agencies
