The crippling cost of war against Hamas


August 26, 2014
Sarah Benton

Articles from Al Arabiya, Financial Times, and Globes (Israeli business news).


Design by Farwa Rizwan/ Al Arabiya News

Why the war on Gaza is bad for Israel

By Rajia Aboulkheir, Al Arabiya News
August 17, 2014

Israel’s Gaza war has cost the country far more than the death of 64 soldiers, with growing domestic discontent and negative economic repercussions.

This discontent was clearly demonstrated when some 10,000 Israelis protested in Tel Aviv on Thursday [August 14th], in the largest public display of disapproval of the government since hostilities began on July 8.

Protesters complained of feeling betrayed by Israeli Prime Minister Benjamin Netanyahu’s government for failing to stop rocket attacks into Israel from Gaza, Reuters reported.

They believe that the Israeli government has not fulfilled its pledge to restore calm to southern Israel and destroy underground tunnels seen as launch pads for attacks from Gaza.

A woman holds up a placard during a peace rally in Tel Aviv’s Rabin Square August 16, 2014. (Reuters)

“Netanyahu should be worried from the criticism he is facing,” Ron Gilran, the Vice-President of Intelligence at the Levantine Group and a Middle East-based risk-consultancy, told Al Arabiya News.

“He is now facing criticism from … the right for not hitting Hamas harder” and “from the left, for once again negotiating [with] Hamas instead of talking and “strengthening” President [Mahmoud] Abbas,” he said.

Demonstrators hold a placard reading in Hebrew: “Agreement with Abbas not with Hamas” as thousands of Israelis protest during a left-wing peace rally in the coastal city of Tel Aviv calling for the Israeli government to negotiate with the Palestinian Authority on August 16, 2014. Photo by Gali Tibbon / AFP

Israel’s war on Gaza has stirred much controversy within as well as outside the country.

“Most Israelis do not wish to control the territories of Gaza and the West Bank,” Gilran said.

“The majority of Israelis question whether giving Palestinians land and statehood will indeed bring an end to the conflict,” he said, adding that on the long term more division among Israelis could emerge depending on the outcome of the talks in Cairo.

The debate about this war became even more heated this week when Israeli human rights group B’Tselem said some military strikes in Gaza were illegal.

The move, which was seen by Israel as reflecting pro-Palestinian sympathy by the group, led the country’s National-Civic Service Authority to stop providing voluntary staff for the organization.

B’Tselem director, Haggai Elad, described the ban as politically motivated and undemocratic.

The volunteers would have been Israeli youth opting to do non-military, voluntary service rather than serve in the Israeli army.

“The biggest problem Israelis have with B’Tselem is not that its sympathizing with Palestinians, but that it doesn’t sympathize with Israelis, Gilran said, adding that Israelis often considers the group “not as a human rights group but a pro-Palestinian group.”

Struggling economy

The effect of the war on Gaza on the Israeli economy has been more pronounced than the political fallout as the country starts to count its losses.

“No doubt there is an accumulated impact of the war on the Israeli economy,” Yossi Mekelberg, the program director of International Relations and Social Sciences at Regent’s University, London, told Al Arabiya News, adding that “the overall costs might end at 4 billion to 5 billion Israeli shekel [$1.1 billion to $1.4 billion].”

On Sunday, the Central Bureau of Statistics said that Israel’s economy grew at an annualized rate of 1.7 percent in the second quarter, its slowest since early 2013 and well below expectations.

Israel’s war against Palestinian militants in Gaza is expected to shave as much as half a percentage point from growth this year, the Israel-based bureau said.

The growth rate was the slowest since a 1.6 percent recorded in the first quarter of 2013.

Meanwhile, exports, which comprise 40 percent of Israel’s economic activity, slid 17.7 percent in the second quarter after virtually no change the previous three months.

El Al Israel Airlines, Israel’s main airliner, this week said its third-quarter revenue would be hurt more than previously expected by the Gaza war, due to cancellations.

The firm said the conflict would reduce its revenue for July-September by $55 million to $65 million and that this would have “an adverse impact on the company’s third-quarter results.”

Meanwhile, tourism has nosedived as rockets from Gaza and images of people rushing to shelters triggered a wave of cancellations at the height of the peak tourism season.
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In July, 218,000 visitors were recorded entering Israel, 26 percent down from a year ago, and the lowest number for any July since 2007, according to the Central Bureau of Statistics.

The economic downturn has in turn affected monetary stability in Israel. Last week, the U.S. dollar enjoyed gains against the Israeli currency, the shekel, of a kind not seen in more than a year.

Some analysts argue, however, that the devaluation of the Israeli shekel was not a consequence of the war and believe the real threat lies in warning from the European Union.

“The Bank of Israel deliberately devalued it because the currency gained around 8 percent in relation to the U.S. dollar which affected exports,” Mekelberg said,adding that the real risk was coming from the EU.

EU states have also recently warned companies against doing business with Israeli firms that are based in settlements or have links with them.

“This [the EU warning] might be a move toward economic steps against Israel if it doesn’t comply with international law, in terms of the way it conducts her war with the Hamas, building settlements or more generally maintaining the occupation,” he said.

“The European Union is a major trade partner and source of investment in R&D,” he added.

Israel’s losses will not be limited to the duration of the Gaza war despite the ongoing truce talks currently taking place in Cairo.

“There might be much deeper residues that will remain [from this war],” Mekelberg said.

The question remains whether these residues that have damaged both sides will convince both Israel and the Palestinians to seek a sustainable end to hostilities.


Israel sets lowest ever rate of 0.25% as Gaza conflict takes toll

By John Reed in Jerusalem, Financial Times,
August 25, 2014

Israel’s central bank cut its benchmark interest rate to the lowest level ever, in an effort to recharge an economy slowed by the war in the Gaza Strip, which is now entering its eighth week.

The Bank of Israel’s Monetary Policy Committee, led by governor Karnit Flug, halved its rate for September to 0.25 per cent, the second successive month it has cut interest rates. The bank said economic growth was slowing even before hostilities, dubbed Operation Protective Edge by Israel, began in early July. It said further moderation of growth was expected due to the operation, part of which – particularly in relation to tourism – was “likely to last for a relatively long time”.

Tourism accounts for about 7 per cent of Israeli gross domestic product, and popular sites like Jerusalem and Tel Aviv’s beaches have emptied of most foreign visitors during the war. Tourist entries to Israel were 26 per cent lower in July than during the same time last year and retail trade declined during the fighting as people deferred purchases, the Bank of Israel said.

Bank figures show GDP growth slowed to 1.7 per cent in the last quarter measured on an annual basis, due mostly to a 10 per cent contraction in exports and investment. The rate cut took markets by surprise, and the shekel weakened on the news.

The central bank action comes amid signs that the two main parties to the conflict – Israel and the militant group Hamas – are determined to continue fighting in the longest of the three Israeli military operations fought in Gaza since 2009.

The war has killed more than 2,100 Palestinians and laid waste to swaths of Gaza. Sixty-four Israeli soldiers and four civilians have been killed. The conflict has also disrupted life in southern Israel. Hardest hit are southern border communities in the area Israelis call the ‘Gaza envelope’, where many residents have fled short-range mortar and rocket fire during the heaviest fighting.

The war has not yet achieved either of the goals set by Benjamin Netanyahu, the prime minister, at its outset: weakening Hamas and stopping rocket fire. Israel last week began targeting senior Hamas figures for assassination, and a senior minister said it would continue pursuing this strategy both inside Gaza and against its leadership in exile.

“The senior Hamas officials need to know that we are going to hunt them, reach them and make them pay the price for what they have done to the southern State of Israel,” said Yair Lapid in comments quoted by the Maariv newspaper on Monday. “No one is immune, not the political leadership, not the leadership overseas.”

The IDF said on Monday that it had targeted a rocket launcher in the al-Sheja’iya neighbourhood east of Gaza City, a focus of its assault during the war.

Hamas and other militant groups continued to fire rockets and mortars into Israel, mostly at border towns and cities in the south. The IDF said that more than 80 rockets had been fired at Israel from Gaza since midnight, and more than 800 since a ceasefire meant to allow the warring parties to discuss an Egyptian-proposed peace plan that would see fighting stop and the blockade on Gaza’s borders eased.

Egyptian officials said on Monday that they were working to secure agreement from all the Palestinian factions, including Hamas, for a new ceasefire that would allow the talks in Cairo to resume.


What is weakening the shekel?

The shekel is at its weakest for six months against the dollar.

By Adrian Filut, Globes
August 19, 2014

After the cannons have stopped roaring and an arrangement between Israel and Hamas is emerging, the shekel is suddenly showing weakness. The shekel slumped 0.7% against the dollar today, following a plunge of over 1%, and reaching its weakest point for six months against the dollar: $3.52/$. Against the euro, the shekel which reached an all-time high during the fighting, sank over 1% yesterday, and continued its slide today. The shekel’s performance against the British pound was similar. Following a period of strength, the shekel is becoming less solid. The economists are now busying themselves by trying to explain what is happening.

“Since August 5, conditions in the market have made it less worthwhile to hold shekels, because the Israeli banks were willing to pay almost 1% annual interest on dollar deposits, and that’s a lot,” forex specialist and trader Yossi Frank told “Globes” today. “At the same time, several horrifying figures for the Israeli economy were published, including negative growth and inflation data, and we’re hearing more combative statements by the Bank of Israel following these figures and seeing actions like those of last Friday after the representative exchange rate was published: massive dollar purchases. For a central bank, that’s not an everyday measure.”

Frank therefore believes, “There are now enough parties who believe that selling the shekel is better than buying it, and we’re therefore seeing a one-directional movement towards devaluation in the Israeli currency.” According to Frank, this trend can be expected to continue. Furthermore, “If parties in Jerusalem behave wisely, we could see an even more dramatic devaluation, with a convergence to an equilibrium of NIS 3.80/$ – an exchange rate the Bank of Israel would like to see.” Frank added that the Bank of Israel should now “make sure that this trend should not be reversed.”

In the long term, Frank says that the solution of a floor or minimum rate is an effective solution to the exchange rate problem. “In contrast to the Bank of Israel’s worries, I don’t think that setting a floor rate would have caused an assault on the exchange rate like the one that occurred in 1998. On the contrary; it would have generated a shekel devaluation, and brought the exchange rate to an equilibrium rate within a relatively short time, to the benefit of the entire economy.”

Calm down no drama

Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) chief economist Ofer Klein wants to make it clear: nothing dramatic is happening here. “If you look at the forex market over the past six weeks,” he says, “the dollar has strengthened against the shekel by more than 2%, but also against the euro and British pound by 2.5%, by 2% against the Swiss franc, and by as much as 3.5% against the Brazilian real. There’s a global trend here towards a stronger dollar, and we should calm down. You can’t talk about a collapse of the shekel; it’s a good period worldwide for the dollar. The dollar’s strengthening against the shekel is not exceptional, and is even more moderate than its advance against the real. We’re part of a global trend.”

Klein is actually asking two main questions: what caused the shekel to remain outside this global trend until now, and what has happened in recent weeks, when the shekel joined the global trend. “Over the past two years, there were a lot of very strong fundamental factors strengthening the currency,” he explains, “such as the gas discoveries; the real interest rate gap between the shekel and the other currencies, which brought a lot of capital into Israel; the massive acquisitions of Israeli companies by foreigners and the overseas offerings by Israeli companies, which also caused a capital inflow; and of course the current account surplus, which totaled $3.5 billion just in the first quarter, an all-time high.”

In the past two weeks, however, there were several developments that pushed the shekel down: the Bank of Israel lowered the interest rate to a low point, which narrowed the interest rate gaps and raised hedging costs, making it more difficult for speculators to conduct shekel-dollar transactions; the war in the south, which caused a dramatic rise in the Defense Ministry’s budget requirements that aroused concern about a higher 2015 budget deficit; and the publication of negative growth figures, including a steep decline in exports that is expected to weaken the Israeli currency. “These three factors pushed the shekel into line with the global trend,” says Klein, who predicts that the exchange rate will stabilize to some extent, “because the fundamental factors won’t change in the long term: gas will continue flowing, and foreigners will go on acquiring Israeli companies,” but the pressure towards a shekel appreciation that has prevailed for the past two years has eased.

Prico investment house CEO Yossi Fraiman asserts that the dollar is not necessarily strengthening against the main currencies because of foreign players. “The Bank of Israel reports indicate that the share of foreigners in the forex market has dropped below 30%, showing that the Bank of Israel is the main player in the strengthening of the dollar in the local theater,” he says.

According to Fraiman, the summer vacation is also a factor in the trend. “We’re in the summer vacation time, when many traders are on vacation, and the number of traders and volumes of trade are lower. Significant individual activity, as has recently occurred, can cause a strengthening of the dollar, even if trading volumes are not particularly high.”

Fraiman believes that the shekel’s weakening is temporary: “In the long term, given the structure of the domestic forex market, which suffers from falling demand and excess supply, without a fundamental measure that will create permanent demand for the dollar, it is likely to go on weakening.”

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