Year of war creates cracks in Israel's borrowing strength
Central bank puts cost of war at 250 bln shekel through 2025
Foreign investors have reduced holdings of Israeli bonds
Analysts expect more sovereign ratings downgrades
Some investors flag ESG concerns over holding Israeli assets
Adds comment from Israel's finance ministry in paragraphs 13-14
By Libby George, Karin Strohecker and Steven Scheer
LONDON/JERUSALEM, Oct 6 (Reuters) -Israel's economy has for almost a year ridden out the chaos of a war that risks spiralling into a regional conflict, but rising borrowing costs are starting to strain its financial architecture.
The direct cost of funding the war in Gaza through August was 100 billion shekel ($26.3 billion), according to the finance ministry. The Bank of Israel reckons the total could rise to 250 billion shekel by the end of 2025, but that estimate was made before Israel's incursion into Lebanon to battle Hezbollah, which will add to the tally.
That has led to credit ratings downgrades, which are amplifying economic effects that could reverberate for years, while the cost of insuring Israel's debt against default is near a 12-year high and its budget deficit is ballooning.
"As long as the war continues, the sovereign debt metrics will continue to worsen," said Sergey Dergachev, portfolio manager at Union Investment.
Although Israel's debt-to-GDP, a core metric for economic health, stood at 62% last year, borrowing needs have blown out.
"Even if Israel has a relatively good base, still it will be painful on the fiscal side," Dergachev said, adding: "And over time, it will put pressure on the rating."
Israel's finance minister has said the economy is strong, and the country's credit ratings should rebound once the war has ended.
The cost of the war is steep due to Israel's Iron Dome air defences, large-scale troop mobilisation and intensive bombing campaigns. This year, debt-to-GDP hit 67%, while the government deficit is 8.3% of GDP, well above the 6.6% previously expected.
While the core buyers of Israel's international bonds - pension funds or major asset managers lured by its relatively high sovereign debt rating - are unlikely to shed the assets at short notice, the investor base has narrowed.
Privately, investors say there is increasing interest in offloading Israel's bonds, or not purchasing them, due to concerns over the ESG implications of how the war is conducted.
Norges Bank sold a small holding in Israeli government bonds in 2023 "given increased uncertainty in the market," a spokesperson for Norway's sovereign wealth fund said.
"What you do see reflecting these concerns is obviously the valuations," said Trang Nguyen, Global Head of Emerging Markets Credit Strategy at BNP Paribas, adding Israeli bonds were trading at far wider spreads than similarly rated countries.
Asked about rising borrowing costs and investors' ESG concerns for this story, Israel's finance ministry said government finances had been "effectively managed" since the start of the war.
"Israel's robust domestic market demonstrates strong demand, and international investors remain familiar with our credit," the ministry added.
While Israel's domestic bond market is deep, liquid and expanding rapidly, foreign investors have pulled back.
Central bank data shows the share held by non-residents declined to 8.4%, or 55.5 billion shekels, in July from 14.4%, or nearly 80 billion shekels, in September last year. Over the same period, the amount of outstanding bonds grew by more than a fifth.
"Israeli institutions actually are buying more during the last few months and I guess some global investors sold bonds because of geopolitics and uncertainty," a finance ministry official said, declining to be named.
Equity investors are also cutting back. Data from Copley Fund Research showed that international investors' cuts to Israel funds, which began in May 2023 amid disputed judicial reforms, accelerated after the Oct. 7 Hamas attacks.
Global funds' ownership of Israeli stocks is now at its lowest in a decade.
Foreign direct investment into Israel dropped by 29% year-on-year in 2023, according to UNCTAD - the lowest since 2016. While 2024 figures are not available, ratings agencies have flagged the war's unpredictable impact on such investment as a concern.
All this has amplified the need for local investment, and government support.
The government in April pledged $160 million in public money to boost venture capital funding for the crucial tech sector, which accounts for some 20% of Israel's economy.
This adds to other costs, including housing thousands displaced by the fighting, many in hotels vacant due to the steep drop in tourists.
The displacements, worker shortages due to mobilisation and Israel's refusal to allow Palestinian workers in, are hindering its agriculture and construction sectors.
The latter has been a key factor curtailing economic growth - which plunged more than 20% in the fourth quarter of last year and has yet to recover. Data from the three months to end-June show seasonally adjusted GDP remained 1.5% below pre-attack levels, Goldman Sachs calculations show.
Israel has thus far had little trouble raising money. It sold some $8 billion of debt on international capital markets this year. Its diaspora bond vehicle, Israel Bonds, is targeting a second annual record haul above $2.7 billion.
But rising borrowing costs, coupled with rising spending and economic pressure, loom.
"There is room for Israel to continue muddling through, given a large domestic investor base that can continue to fund another sizeable deficit," said Roger Mark, analyst in the Fixed Income team at Ninety One.
"However, local investors are looking for at least some signs of consolidation efforts from the government."
($1 = 3.8055 shekels)
Cost of insuring Israel's debt against default spiked as hostilities worsened https://reut.rs/47UULte
Israel's drop in foreign direct investment https://reut.rs/3NdQsja
Reporting by Libby George and Karin Strohecker in London and Steven Scheer in Jerusalem, editing by Alexander Smith and Christina Fincher
අදාළ වත්කම්
නවතම පුවත්
වියාචනය: XM Group සමාගම් ක්රියාත්මක කිරීම පමණක් වන සේවා සපයන අතර වෙබ් අඩවියේ හෝ වෙබ් අඩවිය හරහා ලබා ගත හැකි අන්තර්ගතය බැලීමට සහ/හෝ භාවිත කිරීමට පුද්ගලයෙකුට ඉඩ සලසමින් අපගේ මාර්ගගත වෙළඳ පහසුකම වෙත ප්රවේශය ලබා දෙන අතර වෙනස් කිරීමට හෝ පුළුල් කිරීමට අදහස් නොකරයි. එවැනි ප්රවේශය සහ භාවිතය සෑම විටම (i) නියමයන් සහ කොන්දේසි, (ii) අවදානම් අනතුරු ඇඟවීම් සහ (iii) සම්පූර්ණ වියාචනයට යටත් වේ. එබැවින් එවැනි අන්තර්ගතයක් සාමාන්ය තොරතුරුවලට වඩා වැඩි යමක් සපයා නොමැත. විශේෂයෙන්ම, අපගේ මාර්ගගත වෙළඳ පහසුකමේ අන්තර්ගතය පෙළඹවීමක් හෝ මූල්ය වෙළඳපොළවල කිසිදු ගනුදෙනුවක් සිදු කිරීමට ඉදිරිපත් කිරීමක් නොවන බව කරුණාවෙන් සලකන්න. ඕනෑම මූල්ය වෙළඳපොළක වෙළඳාම් කිරීම ඔබේ ප්රාග්ධනයට සැලකිය යුතු අවදානමක් එක් කරයි.
අපගේ මාර්ගගත වෙළඳ පහසුකමේ ප්රකාශිත සියලු කරුණු අධ්යාපනික/තොරතුරුමය අරමුණු සඳහා පමණක් අදහස් කෙරෙන අතර මූල්ය, ආයෝජන බදු හෝ වෙළඳ උපදෙස් සහ නිර්දේශයන්; හෝ අපගේ වෙළඳ මිල පිළිබඳ වාර්තාවක්; හෝ ඕනෑම මූල්ය උපකරණයක ඉදිරිපත් කිරීමක් හෝ ඒ සඳහා පෙළඹවීමක්; හෝ විශේෂ ඉල්ලීමකින් තොරව ඔබ වෙත ලබා දෙන ලද මූල්ය ප්රවර්ධනයන් ලෙස නොසැලකිය යුතුය.
ඕනෑම තෙවන පාර්ශවීය අන්තර්ගතයක් මෙන්ම XM විසින් සකසන ලද අන්තර්ගතය එනම් අදහස්, පුවත්, පර්යේෂණ, විශ්ලේෂණ, මිල ගණන් සහ වෙනත් තොරතුරු හෝ මෙම වෙබ් අඩවියේ අන්තර්ගත තෙවන පාර්ශවීය වෙබ් අඩවි සඳහා සබැඳි සාමාන්ය වෙළඳපොළ විවරණයක් ලෙස "පවතින පරිදි" සපයා ඇති අතර එහි ආයෝජන උපදෙස් ඇතුළත් නොවේ. ඕනෑම අන්තර්ගතයක් ආයෝජන පර්යේෂණයක් ලෙස අර්ථ දක්වා ඇති ප්රමාණයට, ආයෝජන පර්යේෂණයේ ස්වාධීනත්වය ප්රවර්ධනය කිරීමට නිර්මාණය කර ඇති නෛතික අවශ්යතාවලට අනුකූලව අන්තර්ගතය සකසා නොමැති බවත් එලෙස අරමුණු කර නොමැති බවත් ඔබ සලකා පිළිගත යුතු අතර එබැවින් එය අදාළ නීති සහ රෙගුලාසි යටතේ අලෙවිකරණ සන්නිවේදනයක් ලෙස සලකනු ලැබේ. ඉහත සඳහන් තොරතුරු සලකා මෙතනින් ප්රවේශ විය හැකි, ස්වාධීන නොවන ආයෝජන පර්යේෂණ සහ අවදානම් අනතුරු ඇඟවීම පිළිබඳ අපගේ දැනුම්දීම ඔබ කියවා තේරුම් ගෙන ඇති බව සහතික කර ගන්න.
