Takeover of Gaza City could cost Israel NIS 100 billion, expert estimates

Israel's potential takeover of Gaza City is estimated by a Hebrew University economist to cost NIS 100 billion ($29.2 billion), or 5% of its GDP, compounding the NIS 300 billion already incurred from the ongoing conflict. This substantial expenditure would further strain the nation's finances, which are already grappling with a soaring debt-to-GDP ratio and significant annual interest payments. The operation risks additional credit rating downgrades, leading to higher borrowing costs for both the government and businesses, alongside potential international trade boycotts and divestments that could reduce GDP by an additional 2-3 percentage points, thereby delaying economic recovery and impacting overall quality of life.

Analysis

The proposed takeover of Gaza City presents a significant fiscal and economic shock to Israel, with an estimated cost of NIS 100 billion, equivalent to 5% of GDP. This figure is layered on top of the NIS 300 billion already expended during the 22-month conflict, placing severe strain on national finances. The new operation is not accounted for in the 2025 budget, making increased government borrowing the most probable funding mechanism, which will further elevate the country's debt-to-GDP ratio from its current level of approximately 70%—up from 60% pre-war. This escalation heightens the risk of additional sovereign credit downgrades, following Moody's recent cut to Baa1, which would increase the state's annual interest servicing costs, already at NIS 60 billion. Economically, the initiative is projected to delay recovery, with the Finance Ministry already revising its 2025 growth forecast down to 3.1%. The most significant indirect risk stems from potential international divestment and trade boycotts, exemplified by actions from Norway's sovereign wealth fund. An expert estimates that such sanctions could reduce Israel's GDP by an additional two to three percentage points, compounding the direct military and humanitarian outlays.

Key Decisions for Investors

• Investors holding Israeli sovereign debt should closely monitor for further credit rating downgrades, as the unbudgeted military expenditure is likely to accelerate fiscal deterioration and increase borrowing costs.
• A cautious or underweight stance on Israeli equities is warranted, particularly for companies sensitive to domestic consumption and credit conditions, given the potential for higher taxes, reduced social spending, and increased corporate financing costs.
• The risk of escalating international sanctions and divestment, particularly from European partners, poses a material headwind for Israeli companies with significant export revenues and could introduce further volatility to the shekel.
• Monitor geopolitical developments and official government announcements regarding the scope and duration of the Gaza operation, as these will be key determinants of the ultimate fiscal impact and the timeline for economic recovery.