Four factors to watch in Israel’s economy after the Gaza conflict

Four factors to watch in Israel’s economy after the Gaza conflict

Israel’s tourism and retail market has taken a hit, but the overall business climate will remain strong in the wake of the clash with Hamas in Gaza.

Israel, with its long history of conflicts, has long insulated its business community from the perils of violence. The Tel Aviv Stock Exchange TA-25 index has dropped by only 0.4 percent after three weeks of conflict. Israeli Finance Minister Yair Lapid has pushed for an economic recovery plan he called an “economic Iron Dome for residents of the south.”

However, once a lasting ceasefire finally does occur, what will this mean for Israel’s economy? There are four key economic factors to watch as attempts to reach a ceasefire continue.

1. Tourism

The biggest blow to Israel’s economy has been in the tourist sector. “It is devastating us economically. We are losing tons of money by the minute. The entire profit from the summer is wiped out,” said Leon Avigad, a hotel developer with properties in Tel Aviv and Jerusalem.

Throughout the conflict, Hamas’ most economically damaging coup may have been the rockets that landed at Ben Gurion Airport. Niv Elis, a reporter with the Jerusalem Post, noted that 30 percent of upcoming tours to Israel have been scrubbed. However, tourism accounts for only 2 percent of the GDP. Elis added that the biggest fear about the two-day flight ban would be the perception of danger by global businesses.

The Tel Aviv Port retail complex has seen a decline in business over the course of the conflict. “At our branches on the seafront promenade in Bat Yam and at the Seven Stars Mall in Herzliya, sales are down by about 10 percent compared to regular vacation days,” said Danny Mishel, CEO of Aroma Israel café.

2. Natural gas

Netherland, Sewall & Associates, Inc. (NSAI) recently increased its estimation of Leviathan’s reserves from 18.91 trillion cubic feet (tcf) to 21.93 tcf.

Israeli energy firm Delek Drilling CEO, Yossi Abu, said, “The dramatic increase in Leviathan’s gas reserves gives a range of export options and bases Israel’s position as a leading player in the international energy map with gas reserves of 1,000 billion cubic meters (bcm).”

The Israeli energy sector may face difficulty selling to the lucrative Asian markets, which are now looking to the United States. The renewed fighting may stall plans to ship Israeli gas through the Suez Canal. “Without peace with the Palestinians, we can’t sell our gas to Egypt, Jordan, Turkey, and – who knows? – maybe even to the Europeans,” Josef Paritzky, a former Israeli minister of energy told The Economist.

Despite unlikely allegations that Operation Protective Edge is a ploy to take over Gaza Marine, the military incursion may put strains on Israel’s future energy trade and development in the Eastern Mediterranean, particularly with Turkey.

3. Migrant workers and Israeli Arabs

There are an estimated 4,000 Thai migrant workers in southern Israel. Amid concerns that many of these migrant workers are forcibly exposed to dangerous situations during times of conflict, the Thai government has urged Israel to relocate the migrant workers. The debate surrounding the workers from Sudan and Eritrea revolves mainly around whether they are political refugees or economic opportunists.

Meanwhile, tension is extremely high with the Israeli Arab population. Several universities, hospitals and telecom companies have taken measures against Israeli Arabs who have protested or showed support for Gaza on social media.

However, there may be some promising signs. Shimon Peres stepped down as Israel’s president (largely a ceremonial role) on July 24 and was replaced with Reuven Rivlin. Though considered a hardline member of the Likud Party, Rivlin has long maintained a good working relationship with Israeli Arab politicians. This includes Hanin Zoabi, who took part in the 2010 Gaza Freedom Flotilla.

“Reuven Rivlin will concentrate on Israel, and he will be a president for the people, the society, the Israelis – one who will hopefully build a bridge between Jewish and Arab Israelis,” said Reuven Hazan, a political science professor at Hebrew University of Jerusalem.

Israel’s policies towards its migrant community and Arab citizens will remain a potent issue in the wake of the conflict.

4. Security concerns

The current Gaza crisis has done little to scare off investors. In earlier conflicts, the financial markets traded shekels for dollars only to come up short after hostilities ended. This time they are holding their currency. The 31-day campaign shaved off two percentage points from the quarterly GDP, but the economy recovered afterwards.

Jon Medved, CEO of OurCrowd, explained: “Israel’s economy is primarily a high tech economy, primarily based on trade. About 80 percent of our economy is import-export based.” He also explained how, during the 2006 Lebanon War, Warren Buffet famously made a $4 billion investment to buy 80 percent of Iscar Metalworking. The deal is still celebrated in Israel today as a sign of market confidence.

There is a growing trend of thought in Israel that peace is not necessary to bring about economic prosperity. However, in the US, there is also a movement within the pro-Israel lobby towards ending US financial and military assistance to Israel.

As errant airstrikes on UN institutions continue to take place, the backlash from the international community is likely to continue to increase. The BDS campaign may pick up steam.

The post-conflict environment will also be sure to launch a debate over Prime Minister Benjamin Netanyahu’s focus on Iran instead of the more palpable threat from Hamas’ tunnel network. Widespread talk of efforts to demilitarize Gaza could significantly diminish Hamas’ military capabilities. However, fears of what group could replace Hamas will be a source of concern for Israel’s long-term economic security.

About Author

Chris Solomon

Chris Solomon is a Middle East Analyst and works for a U.S. defense consultancy in the Washington DC Metro Area. He has presented at the University of Maryland’s School of Public Policy, on the U.S. strategy to combat ISIL. Chris’ writing has also appeared on NATO's Atlantic Treaty Association, Raddington Report, Small Wars Journal, and Syria Comment. He holds an MA in International Affairs from the University of Pittsburgh’s Graduate School of Public and International Affairs (GSPIA). You can follow Chris on Twitter @Solomon_Chris