Factory shutdowns near the Gaza Strip are indications of how a
prolonged conflict could tip Israel's slumping economy into a serious
tailspin
By Neal Sandler
Located in the kibbutz of Kfar Aza, just a kilometer from the border
with the Gaza Strip, chemical company Kafrit Industries (KAFR)
operates one of the dozens of factories ordered to shut down until
further notice by the Israeli government, just after its air force
carried out massive air strikes on the Hamas-controlled territory.
Even before the latest escalation of violence began on Dec. 27, the
producer of additives used in the plastics industry had to deal with
intermittent Palestinian rocket fire. But lately Kafrit
Industries—like most Israeli companies—has been more concerned about
the impact of the global recession.
Now, the worst Israeli-Palestinian military flare-up in years has
taken center stage. "Up to now we've been able to meet all of our
commitments, but the security situation has now made operating our
business even more challenging," says Avi Zalcman, chief executive of
Kafrit. Luckily for the company, it has plants in Germany and China
that can at least partially offset the loss of production in Israel.
But others like RMH Lachish Industries (LHIS), a producer of
agricultural machinery based in nearby Sderot, are less fortunate.
"One hundred percent of our production is for export, and we've
already had to cancel orders," says Gershon Goldberg, CEO of Lachish.
The impact on the Israeli economy is only starting to be felt. So far,
plant closures have been limited to nonessential facilities within 4.5
kilometers (2.8 miles) of the Gaza border. Farther afield—though still
within range of Palestinian rocket fire—companies like Intel (INTC),
which employs 2,000 workers at a semiconductor facility in Kiryat Gat,
are continuing to operate at full capacity.
Eyes on the Deficit
The shutdown of plants near Gaza is a relatively minor part of the
broader impact on the Israeli economy of renewed warfare. Israel's
Manufacturers Assn. pegs the current loss of production at $1 million
a day. And though it's still too early to assess the final cost of the
military operation, unofficial estimates have put the price tag at $25
million to $50 million a day. "The cost will run up sharply if
reserves are called up for a ground operation and if the conflict goes
on for more than a few weeks," predicts Leo Leiderman, chief economist
at Israel's Bank Hapoalim (POLI.TA).
Jittery traders worried about geopolitics drove the price of oil up by
as much as 12% on Dec. 29, to $42.20 per barrel before it settled back
below $39. But the reaction of Israel's financial markets has so far
been fairly muted. The shekel has barely budged against the U.S.
dollar in recent days (though it has weakened vs. the euro), even
despite a 75-basis-point interest rate cut, to 1.75%, by the central
Bank of Israel late on Dec. 29 that's intended to spur the economy.
Stocks, too, aren't faring badly. After initially dropping on Sunday
in response to the Israeli air strikes on Gaza, the Tel Aviv stock
market recovered part of its lost ground on Dec. 29. Analysts say the
real test for local financial markets will be the impact of the
military operation on the budget deficit.
"If the deficit increases sharply, this could have a very negative
effect on the shekel and the stock market," says Michael Sarel, chief
economist at Harel Insurance & Finance (HARL.TA), one of Israel's
leading financial companies.
Even without the new conflict, Israel's budget deficit in 2009 was
projected to be at least 5% of gross domestic product, up from an
expected 1.6% in 2008, due to a sharp decline in tax revenues and
plans for increased spending to counter the slowdown. The high cost of
a lengthy military operation could lead to a further mounting of the
deficit.
A Vulnerable Economy
Over the years, the Israeli economy has learned to adjust to various
levels of hostility. However, unlike the situation in 2006, when the
economic boom was only briefly interrupted by the 40-day war in
Lebanon against Hezbollah, the economy is now significantly more
vulnerable. After five years of rapid economic growth averaging around
5% annually, the boom came to a screeching halt in the third quarter
of 2008 as the global recession hit the local economy.
The bad news continues to pile in. Industrial production fell by 3.5%
from August to October, while consumer spending was down by 4.2% in
the same period and export growth has fallen off. Even unemployment,
which fell to 6% in the third quarter—its lowest level in years—is on
the rise. Thousands of workers have been laid off in recent weeks from
the country's high-tech industry, which accounts for more than 40% of
Israel's industrial exports and has been hit by the global downturn.
Most experts have been forecasting 2009 economic growth at no more
than 1%. But those projections were made prior to the latest
escalation of violence. They could prove overly optimistic if the
violence continues and Israel gets bogged down in a lengthy operation
in the Gaza Strip. The impact would be even worse if the fighting
widened into a regional conflict.
Neal Sandler is a correspondent for BusinessWeek
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