The crisis in the talks between Israel and the Palestinians dominates the media headlines the world over, and, needless to say, in Israel. It may well be that the process, which has been carried on for months, will be temporarily suspended or possibly stopped altogether for an indefinite period of time.
Yet, one way or another, if you take a look at the stock market monitors, you will not be able to notice any significant developments taking place in Israel. The stock market continues to rise and to be influenced primarily by the fluctuations in the world markets. The same holds true for the debentures market. The shekel (NIS) continues to be one of the strongest currencies in the world, and in recent weeks it has even continued to strengthen against the currency basket.
However, not all share in the surge. In fact, our Palestinian neighbors have been undergoing a slump recently. Since mid-March, when it became apparent that the [diplomatic] talks were leading nowhere, the Ramallah stock exchange has declined by 8%. At the same time, the Tel Aviv stock exchange has recorded an increase of 2%. It's worth noting in this context that since the beginning of the year until the end of February, the Palestinian stock exchange did better than the Tel Aviv stock exchange, rising by 5% more than the Israeli bourse.
The outcome of the negotiations could surely have far-reaching implications for the Palestinian Authority (PA) — much more so than for Israel. The Palestinian economy has been faltering lately. According to the International Monetary Fund (IMF) estimates, in 2013 the Palestinian economy grew by a mere 1.5%, while unemployment soared to 25% (as against an economic growth rate of 3.3%, and a notably low unemployment rate of less than 6% in Israel). The Palestinian government continues to accumulate debts, the government budget deficit is rising, and the public coffers are depleted.
An even more crucial point related to the prospects of achieving an agreement with Israel has to do with the dependence of the Palestinians on foreign aid. The various international parties concerned, first and foremost the United States and the European Union, are streaming close to $1 billion annually into the PA coffers. The aid is far more vital for the Gaza Strip. Four out of every five residents in Gaza depend on international aid for their survival. This dependence [of the Palestinian economy] on foreign aid is so high that, when in 2012 the authority received only 80% of the promised aid, the economy plunged into a recession — for the first time in the last decade.
Whether or not the Palestinians are willing to admit it, the motivation of the international aid organizations and foreign countries to pour funds into the PA depends on the existence of a peace process with Israel. In case the process fails and no agreement is reached, and especially if the Palestinians are perceived as the party that torpedoed the agreement, the foreign aid they receive may drastically and immediately drop, thus threatening the economic collapse of the PA.
Israel, on the other hand, has a stronger and more independent economy. Still, the absolute indifference to what is happening on the domestic front manifested by the local financial markets is rather difficult to understand. One may thus wonder how come the tension in the Ukraine gave rise to such deep concern among investors in Tel Aviv, while they do not seem to be affected by the events in the arena of negotiations with the Palestinians.
True, the times are long gone when the local stock market used to get all wound up by any report on potential negotiations between the parties. Likewise, the wars waged in the region in the last decade had all but a fleeting effect on the behavior of the financial markets, and virtually no impact on the economy. Nevertheless, the general indifference is inexplicable.
These days, Israel may face any of a range of possible scenarios, some of which it has not encountered before. Still, it's worth noting that maybe, as was the case in the past, nothing will really change, as far as Israel is concerned, and the real action will continue to take place on the TV screens in the living rooms of Israelis rather than on the Tel Aviv stock exchange monitors. This time, though, a number of previously unknown scenarios may come to pass. Thus, the Palestinians may appeal to the UN from a position of a state, or possibly to International Criminal Court in The Hague. What’s more, harsher sanctions may be imposed by the Europeans on Israel — and this, while the Americans gradually withdraw from the diplomatic process, and show less involvement. Such developments could harm the economic status of Israel and impact the financial markets.
There is certainly no reason to panic. Yet, there is a whole range of possible reactions between panic and indifference that may be reflected in the behavior of the economy and the financial markets. Each one has his own political views, which can hardly be put aside when making investment decisions — definitely not when considering the sensitive events related to the diplomatic process.
The Israel Defense Forces (IDF) has spoken out and declared that it is ready for any scenario. The rational investor, too, should, as far as possible, take these risks into account, the way any other risks are contemplated, and prepare for the potential scenarios facing us.
The author is chief economist at Meitav Dash Investment House.
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