Winds of calm: Prof. Leo Leiderman, Bank Hapoalim's chief economic advisor and one of the leading professors at Tel Aviv University and a leading candidate for governor of the Bank of Israel in the past, sends a reassuring message regarding the economic consequences of the war.
Prof. Leo Leiderman,
In an exclusive interview with Israel Hayom, Leiderman says that Israel's economy is resilient even in a state of war, predicting that rating agencies will not rush to lower the rating horizon, and certainly not the rating itself. As for stock market falls, Leiderman says, "Experience around the world and in Israel indicates that large unexpected shocks may create an 'overreaction' or 'overshooting' in the financial markets."
What do you think about the economic consequences of the war in Gaza?
"First of all, and before focusing on the economic issue, I would like to emphasize that in these difficult times of war, our hearts should be with the families of the fighters, the wounded and the prisoners. I believe in the human, technological and military strength of the IDF and the defense establishment and in their ability to win. The people of Israel are known for their resilience, especially in times of trial, and there is no doubt that this time too, they will prove cohesion and resilience and will support the army."
Still, as a macro person, how do you see the Israeli economy in the new situation?
"It is still too early to seriously assess the full economic effects of the war. We don't know how the fighting will develop, whether it will involve ground operations, whether the war will focus only on the southern sector, and so on. We do know that the cost and burden of war will depend heavily on its length. The longer the fighting continues, the higher the costs, even in a nonlinear way."
The dollar strengthens against the shekel, illustration, photo: GettyImages
What are the economic issues that should be at the center of the discussion about what is expected in the economy?
"First, it is clear that the government will have to open the 2023-2024 budget in order to adapt it to the economy's new security needs. Based on past experience, an increase in defense and rehabilitation expenditures is expected. While it will be possible to finance part of the increase in expenditure by cutting some of the other items, we will not be surprised if there is a significant increase in the budget deficit.
It is certainly permissible for a state in a state of war to increase the deficit temporarily. It is also important to remember that the United States is expected to support the government and defense establishment through various channels in dealing with the new situation."
What else?
"The war is liable to be accompanied by a significant depreciation of the shekel, an increase in inflation expectations, and some slowdown in economic activity and growth. A prolonged war will certainly harm private consumption, which is a major engine of economic activity. As noted, it is too early to quantitatively assess the above effects, including with regard to the Bank of Israel's interest rate decisions. We'll also have to wait and see if the war changes the government's plans to reform the justice system."
Is a recession expected? Or a crisis?
"We believe that even in war, Israel is a resilient economy. The state of the balance of payments, the high foreign exchange reserves, the low public debt to GDP ratio, the economy's high credit rating, support from the US, and the Bank of Israel's high credibility in the eyes of investors in Israel and abroad are all expected to help the economy cope with the new situation, without sliding into recession or crisis."
Tel Aviv Stock Exchange, Photo: Joshua Yosef
Aren't you worried about the sharp declines on the Tel Aviv Stock Exchange and the possibility of a sharp depreciation of the shekel when forex trading opens tomorrow?
"Experience in Israel and abroad indicates that large unexpected shocks may create an 'overreaction' or 'overshooting' in the financial markets. The fluctuations in the stock market today occur under very low trading volumes, and some of them may be more emotional than calculated reactions. Experience also points to various episodes in the past in which investors who acted impulsively in the short term later regretted it. Of course I don't recommend making generalizations.
Every investor and household should act according to their own considerations, including their approach to uncertainty and risk. It is important to remember once again, Israel is a strong and resilient economy even in a state of war."
Finally, what do you think the decision of rating company Moody's at its meeting this Friday regarding Israel's credit rating?
"In my humble opinion, it would only be reasonable, logical and justified that Moody's and the other credit ratings would leave Israel's rating unchanged. This is until the situation in all the issues mentioned above becomes clearer. The rating agencies also know that Israel is a country with economic and financial resilience, so I don't see any justification at the moment for them to rush with a decision to change Israel's rating."
"They'll wait to see what happens." Moody's Credit Rating Agency, Photo: Reuters
Also the rating horizon?
"My expectation: unchanged. They'd rather wait."
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