Former INSS head: Investors in Israel need to see plan for a day after the war

Israel needs to signal to global economic players that the country is handling the economic impacts of the Israel-Hamas War or risk losing their confidence, said former Institute for National Security Studies (INSS) head and economics professor, Manuel Trajtenberg.

Israel can give investors this confidence by presenting a strategy that shows there is a "light at the end of the tunnel," said Trachtenberg, who served as the INSS executive director until May 2024 and is currently an INSS visiting researcher.

Even if this strategy does not solve everything, Israel should show that there is a diplomatic plan that can put a stop to the current situation. This will show investors that there will be a "day after" the war and build confidence in the country's economy.

"Currently, that doesn't exist," he said.  

The economic signals Israel is currently sending are not good, said Trajtenberg. "For example, there are no budget discussions for 2025. There were supposed to be, and they were canceled," he said, explaining that without discussions, there will be no decisions such as raising taxes, which he says will be necessary to handle the war's economic fallout.  

"If you don't make decisions today, then the ratings companies, the investors, all the economic players are watching and seeing a country that has a swelling deficit and is unable to make decisions to handle the fiscal issues."

"We have always been proud that even if there is a security event, the economy keeps functioning and activity continues, and so international investors can be confident that their investments won't be hurt," said Trajtenberg, saying that, among other things, this has brought hundreds of international corporations to invest in Israel and set up factories, labs, and R&D centers in the country.

However, the uncertainty that comes with the ongoing war could hurt the way international investors and big international corporations look at Israel.

"Investors say to themselves, 'ok, you know what, there are enough opportunities in the world, we won't go in there,''' he said, explaining that Israel needs to present a plan that would give investors confidence in order to preserve investment in Israel and prevent its deterioration.

"Ignoring this will take a serious toll over time. It's very easy to hurt the investor's trust in the economy and very hard to get it back. It takes a very long time."

Making decisions, even if they are difficult ones, signals that the country is serious and that it recognizes that there is a problem and knows how to handle it, he added.

Failing to address the war's economic impact could lead to the markets reflecting the view that "Israel has become an irresponsible country," which will lead to another credit rating drop and an increased risk premium, and hurt Israeli firms raising capital, Trajtenberg explained. This would cause Israel's expanding deficit to continue to grow.

Loss of investor confidence is only part of the problem

A potential global loss of confidence in Israel's economy is one part of a twofold problem Israel's economy is facing, said Trajtenberg. The Israel-Hamas war has also come with direct costs - security spending in 2024 will be more than 10% of GDP compared to 5.5% in the recent years before the war, he said.

While even the 5.5% figure is much higher than the OECD average and than the average spending for other countries Israel wants to be like, it also makes sense historically and has been dropping over time, explained Trajtenberg.

But the 10% figure "is dramatic," he said, explaining that Israel can handle it, but not without a cost. "Now we certainly can handle something like this, it has a cost of course, it hurts, hurts quality of life, but we can take it," he said. "The question is what happens from now on."

"If the intense fighting, whether in Gaza or the north, goes on for an extended period, it will bring us to a very complicated place economically," he said, explaining that Israel has always based its security planning on the assumption that security events will be short and have a clear start and end date.

"The majority of the army is made up of reserves, and so it is clear to all that continued reserves call-up has a vast economic cost," he said.

"On October 7, the war began and required a massive call-up of reserves for a long time, and so the cost to the economy, which is far beyond just the budgetary cost, is very high."

Israel's economy reflects what is going on in terms of security and diplomacy, said Trajtenberg. This means that "in all respects, Israel needs a light at the end of the tunnel," he said.

This is true for families suffering because of the war, and this is true for the army, he said, adding that this is also true for the economy.

"We cannot act as if we have endless breathing room, as if we have endless reserves of social, economic or personal resilience."