At the face of it, Israel’s devastating campaign to obliterate the Gaza strip had dire consequences for the country’s economy. At the fourth quarter 2023, its economy contracted nearly 20%. Consumption was down 27%.

Investment dropped 68%. Exports contracted 18% and imports 42%. The economy is rattled by a steep decline in tourist revenue too, not surprisingly.

The purported war ‘against Hamas’ – the attempt to make life for Palestinians so impossible that they will move elsewhere and be it the Sinai desert – demanded the recruitment of hundreds of thousands of reservists. This decimated the workforce by 8%, not counting the Palestinian labourers who will probably never take up tools in Israel again.

Vast amounts of money are spent on bombs, ammunition and defence equipment. The evacuation of border settlements, soldiers’ wages and compensation for KIAs (killed in action) adds to this. The throttled economy reduced tax revenue (-$35bn), while defence expenditure mushroomed (+$163bn, a third of the budget expenditure), creating a budget deficit of 7% of GDP, more than initially projected.

All major credit agencies have downgraded Israel’s credit rating, with negative outlook. Yet it is still comfortably within the range considered “investment grade”, on par with Poland and Chile.

Look closer and it seems that Israel is, if anything, only peripherally affected. While not financing its war endeavours with the same ease and macroeconomic success as Russia, which sees her economy growing, poverty retreating, unemployment falling, and international debt disappearing, Israel is not hard pressed. The shekel, its national currency, is now stronger than at the start of the conflict. Despite its fiscal/defence largesse, inflation in March was 2.7% per annum (Central Bureau of statistics, Israel).

A sale of eight billion, $US-denominated, 10-year government bonds in March was almost five times oversubscribed, yielding 5.6% at the time of writing – a modest spread of 120 basis points over US treasuries.

Israel’s government debt, currently 67% of GDP, is still enviably modest when compared with most industrialised countries (Italy: 141.7%). The combination of low over-all indebtedness and the ease issuing new debt makes the rating downgrade somewhat academic.

Raise VAT a little, as was legislated, and start being less generous when funding religious right-wing groups, as was not legislated (who are annoyingly exempt from military service), and Israel’s war efforts are easily within its budgetary means.

A vast pool of private credit is ready to step in any time, even when banks are coy syndicating loans publicly. The US is not only delivering bombs (meekly threatening to delay for a week or two) and topnotch air defences, as demonstrated in the recent Iran attack, but also shouldering now 50% of Israel’s war cost. It is also worth noting that Israel, like Japan, is not overly dependent on foreign investors. It can raise credit domestically, in its own currency, with comparable ease. My Israel Electric Corp. bond has expired last year, yet it would not have suffered.

The reasons stated by Moody’s Investors Service for the downgrade are worth reading regardless of their insignificant impact on investor behaviour. The main driver for the downgrade of Israel’s rating to A+ is Moody’s assessment that the “ongoing military conflict with Hamas, its aftermath and wider consequences materially raise political risk for Israel as well as weaken its executive and legislative institutions and its fiscal strength, for the foreseeable future.

While fighting in Gaza may diminish in intensity or pause, there is currently no agreement to end the hostilities durably and no agreement on a longer-term plan that would fully restore and eventually strengthen security for Israel.

“The weakened security environment implies higher social risk and indicates weaker executive and legislative institutions than Moody’s previously assessed. At the same time, Israel’s public finances are deteriorating…” (As quoted by Adam Tooze, Substack, Chartbook 266).

Israel, like Japan, is not overly dependent on foreign investors- Andreas Weitzer

I think one can read Moody’s elegy not so much as an economic warning but as a doleful critique of the path Israel has chosen for its future. Sixteen years of intermittent Netanyahu government has changed the country, undermined its institutions and dehumanised its social construct, squandering the good will Israel had enjoyed since its foundation. There’s no plan how to make space for the Palestinians kept behind fences for decades and bombed to smithereens now.

Nobody talks about who will finance the rebuilding of Gaza once the war is over. The degradation of Israel’s own Arab population to second-grade status is intentional and cruelly legislated, as is the murdering and displacement of Palestinians in the West Bank. What makes this master-race approach possible is also the callous indifference of Arab countries now and then, when, prior to 1967, they have done nothing to improve the Palestinian lot – at a time when Egypt was in control of Gaza and Jordan ruled over the West Bank.

We focus on the nail-curling atrocities of the rabid Hamas attacks and Israel’s right of “self-defence”, without acknowledging that the Hamas rule and rivalry with the corrupt PLO was planned by Netanyahu. Hamas had attacked, knowing that Israel would strike back incommensurably harder. It was a crime to their people too.

They hoped to cement their grip over Gaza as Netanyahu wanted to have a never-ending war to avoid a reckoning at court. Both look like they’ve got what they wanted.

Israel, like many other democracies, has moved to far-right positions under Netanyahu, to positions of ideological cruelty and democratic neglect. Too many in Israel endorse this change unthinkingly, as if living in Putin’s Russia. Investing in Israel, its bonds and stocks, is therefore for many not only a judgement on financial fundamentals, but also a question about the morality of investment. Is Israel the new vice investment?

Many demonstrating students in the US, putting up tents and waving placards on their campuses, seem to think so. They demand from their universities to better divest from Israel. To what amends? To change US foreign policy?

I am surprised how politically timid students have become since 1968.

Besides, there are many worthy Israeli enterprises not involved in this war, many Israeli citizens not agreeing with the degradation of Israel’s body political, its institutions and the terrible suffering of Palestinian Arabs. To shun Israel investment lock, stock and barrel is rooted in the idea that, as a country, it should not exist. I, for my part, cannot sign up to this.

Andreas Weitzer is an independent journalist based in Malta.

The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.