BERLIN
Israel is expected to be forced to issue bonds at near-record levels again this year, as the country borrowed billions of dollars last year to finance its continued attacks on Palestine.
While the attacks persist, the costs also increase for Israel to keep attacking Palestine, as international credit rating agencies drew attention to the macroeconomic risks facing the Israeli economy in their recent reports.
Moody’s issues 1st downgrade on Israel’s credit rating
The US-based bond credit rating agency Moody’s, which had put Israel’s “A1” credit rating on review for a possible downgrade, finally downgraded its rating to “A2” last week, also keeping Israel’s credit rating outlook on negative, signaling further downgrades in the case of continued conflict.
Citing the ongoing conflict and the wider consequences as the main reason for the downgrade, Moody’s noted in a recent statement that the situation increases the risk of weakening Israel’s executive and legislative institutions, and its financial strength.
It also mentioned that the country’s debt burden will be higher than assumed pre-conflict, as the agency estimates Israel’s public debt to GDP ratio to reach a peak of 67% in 2025.
After the downgrade, Israel is kept in the “investment grade” category, though it has become more difficult to find the funds to finance the attacks.
Meanwhile, the US-based credit rating agency Fitch Ratings placed Israel’s rating, which was at “A+”, on negative due to geopolitical risks caused by the attacks on Palestine.
Debt deficit estimated to increase further
The increase in public expenditures due to the attacks on Gaza caused Israel to run a deficit last year, despite the budget surplus of 0.6% of its GDP in 2022.
Israel has seen a sharp decline in revenues in October, as the country’s budget deficit was at 4.2% of GDP in 2023, though it was at 1.5% in September pre-conflict.
Israel’s 2024 budget, currently awaiting final approval, is estimated to have a fiscal deficit of 6.6% of GDP, and the deficit could climb higher if the conflict escalates.
Amir Yaron, the governor of the Bank of Israel, had called on the Israeli government to adhere to fiscal discipline and balance planned spending with cuts in non-essential areas, and to increase some taxes.
Analysts estimate bond issuances to hike
Israel has yet to back down from its operations in Gaza and it has yet to end the genocide in Gaza despite the worldwide pressure and protests.
Israel is faced with high borrowing costs in bond issues due to the risks of the conflict, as it has borrowed billions of dollars through privately negotiated deals since Oct. 7.
The country continues to use borrowing channels to finance its attacks despite the high costs, and so, it is expected to run a budget deficit close to record levels, according to analysts.
They also said Israel took out high loans during the pandemic to mitigate its effects, adding that the country is expected to borrow again close to pandemic levels in 2024, resulting in Israel’s bond issuance to hike 30% year-on-year.
Analysts stated that if the attacks on Gaza persist for a few more months, financing from domestic investors may come under pressure, leading to borrowing from international sources at higher interest rates.
Sales of int'l pro-Israel companies experience negative impact
The ongoing attacks on Palestine are adversely affecting the Israeli economy, as well as the international pro-Israel companies that make public statements of support and send aid to the country.
While these companies are the target of boycotts and protests around the world, the sales of companies, especially the US-based ones, seem to have been affected, and the results are reflected in balance sheets.
Although the specific impact of boycotting is difficult to verify or quantify, analysts say that investors remain cautious when investing in these companies.
The US-based fast food chain McDonald’s had announced that its branches in Israel would provide free meals to the Israel Defense Forces personnel in the aftermath of Israel’s attacks in Gaza, which was met with criticism, especially by other McDonald’s branches in Muslim-majority countries.
The branches in Saudi Arabia, Oman, Kuwait, the United Arab Emirates, Jordan, and Türkiye issued statements to distinguish themselves from the Israeli branch, expressing support for Gaza.
Given these developments, the revenue of McDonald’s fell short of market expectations in the fourth quarter of 2023.
Boycotting, protests bring about real change reflected in balance sheets
The US coffee chain Starbucks sued its labor union after Starbucks Workers United said “Solidarity with Palestine,” on the X platform, which caused many discussions.
Some social media users started boycotting the coffee chain, posting homemade recipes on their accounts as alternatives to the company’s offerings.
Starbucks said it has no political agenda and denied allegations that it is being used to fund government or military operations.
The company lowered its annual sales forecast in its balance sheet for the last three months of 2023, partly due to the negative impact of sales in the branches in the Middle East, and although the revenues of Starbucks climbed 8%, they fell short of market expectations.
The coffee chain has seen a significant impact on traffic and sales in its branches in the Middle East due to the conflict, said Laxman Narasimhan, the CEO of Starbucks, in a conference following the balance sheet announcement.
The US pizza chain Domino’s was also subject to boycotts after the footage of the company distributing free meals to Israeli soldiers surfaced the internet and went viral on social media.
The consumer reaction in Malaysia was effective in the decline of the company’s sales, as Donald Jeffrey Meij, the CEO of Domino’s Pizza Enterprises, said in a conference on Feb. 6 that it is commonplace for US companies in Asia, and more so in Malaysia, to be affected by the conflict in the Middle East.
The US-based multinational fast-food corporation Yum! Brands, owner of other fast-food companies such as KFC, Pizza Hut, and Taco Bell, fell below market expectations in the fourth quarter of 2023 due to the conflict in the Middle East, as the sales of KFC and Pizza Hut in the region declined.
The UK-based consumer goods firm Unilever’s sales in Indonesia also plummeted in the same quarter due to boycotts in response to the geopolitical situation in the Middle East.
*Writing by Emir Yildirim in Istanbul
