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Middle East Amp North Africa
Unrest takes its toll on Israel’s economy
From the Financial Times of Wed, 26 Nov 2014 09:30:11 GMT
Businesses and shops are closed in the Old City of Jerusalem during a strike, on June 12, 2014, in solidarity with hunger-striking Palestinian prisoners in Israeli jails, many of whom have been hospitalised. Some 285 Palestinian prisoners are observing a mass hunger strike in protest against their being held without charge under a procedure called administrative detention. Of that number, 125 have been refusing food for more than six weeks, with 65 of them being treated in hospital, according to the Israeli Prisons Service. AFP PHOTO/AHMAD GHARABLI (Photo credit should read AHMAD GHARABLI/AFP/Getty Images)©AFP

Shuttered shops and reduced tourist arrivals show the conflict with the Palestinians is testing a usually resilient economy

The souk of Jerusalem’s Old City, where vendors sell T-shirts extolling the Israel Defense Forces alongside those calling for the liberation of Palestine, is largely bereft of tourists.

Israeli tour operators, vendors and restaurants had welcomed a return of customers in recent weeks after business dried up during Israel’s summer war against Hamas in the Gaza Strip. But they say a recent spate of stabbings and vehicle assaults is deterring overseas visitors once more and has sparked a wave of group cancellations.

“People have to put down payment for January or February now, and are hesitant to do so,” says Tamar Lurye, general manager of incoming tourism for Ophir Tours, Israel’s largest privately owned tour operator. “Agents are postponing trips, and these are groups that had already postponed once because of Protective Edge [Israel’s assault on Gaza].”

Israel’s economy, which had been growing at an annual rate of 3 per cent recently, shrank by 0.4 per cent in the third quarter, due to the impact of the war in Gaza and the drop in tourism, which makes up 2 per cent of economic output.

The war went on for 50 of the quarter’s 92 days and was the longest of three Israel has fought in Gaza since 2009.

The contraction is the first in five years for Israel’s technology and service-oriented economy and has sent a signal that its conflict with the Palestinians is taking a growing economic toll.

Israel’s most recent recession was in 2001-2, when the bursting of the dotcom bubble coincided with plunging business confidence caused by the second intifada – or violent Palestinian uprising against Israeli rule – after which it bounced back strongly.


The Bank of Israel this week said economic activity was rebounding in the current quarter, as it has after Israel’s other conflicts, most recently the second Lebanon war of 2006.

However, the new unrest in Jerusalem – a string of attacks by lone Palestinian killers on civilian targets that caught Israel’s security establishment off-guard – has raised new doubts about whether the recovery can last. There are some signs that Israel’s resilient economy could be softening for the longer term because of the risk of renewed conflict and a souring business climate.

Fitch, the rating agency, last week revised its outlook on Israeli long-term debt from positive to stable, citing the conflict with Hamas and the stagnation of the peace process as factors.

“The key thing is the Gaza conflict, which cost more than we had anticipated,” says Paul Gamble, a director with Fitch Ratings.

The military operation cost Israel 0.6 per cent of its gross domestic product, the agency said, and additional military spending next year will widen its budgeted deficit to 3.4 per cent of GDP next year. The government of Benjamin Netanyahu originally targeted a deficit of 2.8 per cent for this year but according to Fitch, it will be 3.3 per cent.


In the real economy, tourism is the main industry reporting a downturn, with tourist arrivals down 19 per cent in October, according to Israel’s tourism ministry. El Al, Israel’s national airline, reported a 7 per cent drop in quarterly revenue this week, due to flight cancellations and a decline in bookings during the war, when rocket fire disrupted flights to Tel Aviv for two days.

There are other signs from companies of weakening faith in the Israeli investment climate, because of high taxes and a volatile regulatory environment. Exploration of the country’s large offshore natural gas reserves has ground to a halt amid misgivings among energy companies about Israeli regulatory risk.

Industrial stalwart Israel Chemicals, angered by a new resource levy and a finance minister Yair Lapid’s veto of a planned megamerger with a Canadian rival, announced this month it would invest $435m in its Spanish operation even as it cut $80m of costs in its home country.

But Israelis pride themselves on the solidity of their economy in the face of regional risk and a seemingly intractable conflict with the Palestinians. In September – less than a month after the end of the Gaza war – Intel, the chipmaker, announced a $6bn plan to make a new generation of chips at its factory in the southern town of Kiryat Gat, the largest foreign investment in Israeli history.

Economists say although few data are available on economic activity in October and November, there are no signs of a slowdown yet. There are also some positive signs for the economy, including a weakening of the shekel that could give exporters a tailwind, they say.

“Putting it all together it’s not a bad picture . . . I don’t think the situation has been deteriorating,” says Leo Leiderman, chief economist with Israel’s Bank Hapoalim. But despite his optimism Mr Leiderman adds a note of caution: “Now, of course, it will depend on the geopolitical situation, tourism, the situation in Jerusalem, and so on.”

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