The deteriorating security situation in Israel and the impact it may have on economic growth has led to the second-biggest surge in credit risk this month among developed nations.
Israel’s credit-default swaps, contracts insuring the nation’s debt against default for five years, have advanced four basis points so far this month, the second-biggest gain after the U.S. among 23 developed countries, to 73 basis points, CMA prices show. The swaps increased five basis points last week, the most since August 2014. Meanwhile, the shekel depreciated the most in two months during the same period.
Israeli Prime Minister Benjamin Netanyahu on Sunday told his cabinet he accepts arrangements brokered by U.S. Secretary John Kerry meant to reduce tensions over a Jerusalem shrine that have sparked a wave of Palestinian attacks on Jews. A surge in violence this month has led to the deaths of nine Israelis and more than 50 Palestinians.
Israel’s economy retreated during a previous five-year Palestinian uprising that began in September 2000. The nation’s gross domestic product increased just 0.1 percent in 2001 and contracted the same amount the following year, the worst economic performance since Israel’s birth, according to the Central Bureau of Statistics.
“As violence erupts not only day after day but week after week, investors are starting to raise concerns about how long this will go on and how this will affect the economy,” Alex Zabezhinsky, the chief economist at Bnei Brak, Israel-based Meitav Dash Investment House Ltd., the country’s second-largest investment house, said by phone. “In a time of security tension consumers are going out less and thus they are spending less.”
Israel Brokerage & Investments Ltd. said last week investors should sell the shekel as the potential reduction in private consumption and inflation in an already slowing economy are likely to add to pressures weakening the currency. Excellence Nessuah Investment House Ltd. recommended investors move a substantial part of their portfolios out of the country temporarily.
Even before the current wave of violence, the Finance Ministry cut its growth forecast to 2.6 percent this year and 2.9 percent next year, down from previous projections of 3.1 percent and 3.3 percent. The country’s economy slowed almost to a standstill in the second quarter.