War-focused Netanyahu stalls on budget; UN forced to halt Gaza aid, risking polio vaccination drive

The United Nations has stopped humanitarian operations in Gaza after an Israeli evacuation order, according to a senior UN official, the most serious obstacle to aid deliveries amid a deepening crisis that’s seen the area’s first case of polio in 25 years.

Houthi militants in the Red Sea, but there were no signs of a spill so far, the European Union naval force in the region said.

Israel’s economy hit as war-focused Netanyahu stalls on budget

With domestic and international attention focused on Israel’s war in Gaza and escalating tension with Hezbollah, Prime Minister Benjamin Netanyahu’s administration has stalled discussions on next year’s budget — set to be the most challenging and crucial in decades.

Netanyahu and Finance Minister Bezalel Smotrich insist there will be a fiscal framework in place for 2025 but haven’t explained delays in its formulation, leaving markets and investors guessing on how it will be put together at a time that the conflict is causing the budget deficit and debt issuance to soar. Budgeting is usually well under way by this time of year.

Top central bank and finance ministry technocrats have joined credit-rating agencies and business leaders in warning that a hiatus will cloud Israel’s economic prospects and elevate the already-high risk premium on its assets.

Tensions over the budgetary process were evident in a letter Bank of Israel Governor Amir Yaron wrote to Netanyahu this month. He urged the prime minister to follow up on a meeting they held weeks ago to discuss ways to steady the nation’s finances — including trimming spending and raising taxes.

Yaron, who under Israeli law is the government’s top economic adviser, argued that permanent budgetary adjustments totalling some 30 billion shekels ($8-billion) were needed next year to sustain increased defence and other war-related expenditures. They were also necessary, he said, to steady Israel’s debt-to-gross domestic product ratio — which the central bank sees at 67.5% this year, up from around 59% in 2022.

“Maintaining the budget framework for 2024 and promoting the orderly process of structuring the budget for 2025 are critical,” the governor wrote.

Read more: Israel’s growth slows much more than expected as war drags on

GDP grew by just 2% last year, almost half the rate the finance ministry expected before the outbreak of the war, and JPMorgan Chase sees an expansion of just 1.4% this year after cutting its forecast twice over the past two weeks.

Disquiet over Israel’s economy, the government’s handling of its finances and the risk of intensified fighting is becoming evident in the financial markets. Yields on the government’s 10-year shekel bonds have risen by almost 90 basis points this year, while their spreads over US Treasuries are at an 11-year high. Israel’s dollar bonds are among the worst performers in emerging markets this year, Bloomberg indexes show.

Fitch Ratings cut Israel’s rating by one notch to A, the third-highest level, on 13 August. That followed a similar move by Moody’s Investors Service in February.

“The conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts,” Fitch said.

Fighting erupted after Hamas militants swarmed into southern Israel on 7 October, killing about 1,200 people and taking 240 hostage. Israel responded with an air and ground assault that has reduced large tracts of the Gaza Strip to rubble. More than 40,000 people have been killed, according to health officials in Hamas-run Gaza.

Israel and Hezbollah have also been engaged in tit-for-tat strikes since the war began. Those escalated on Sunday, when 100 Israeli warplanes swooped over southern Lebanon, taking out thousands of Hezbollah missile launchers in what it termed a pre-preemptive strike, and the group responded by firing more than 200 projectiles across the border. Hamas and Hezbollah are both backed by Iran and are designated as terrorist organisations by the US.

Israel has spent 88 billion shekels on the war so far — almost 5% of GDP — and has raised more than 190 billion shekels through July to help fund the military and plug the fiscal deficit. If sustained, this year’s borrowing will break the record set during the Covid-19 pandemic in 2020.

The deficit rose to 8.1% of GDP in the 12 months through July. The finance ministry and central bank expect it to be around 6.6% for this year as a whole, but that’s presuming the conflict with Hezbollah doesn’t worsen.

“Fiscal policy is the elephant in the room” as far as markets are concerned, Yaron said last month. “If you wait for the last minute, you make bad decisions.”

Budget proposals are typically drafted early in the Israeli summer, brought to the cabinet for approval by August and passed by parliament by year-end. Under Israeli law, the process can be extended until as late as the end of March. The government automatically collapses if it isn’t concluded.

Netanyahu and Smotrich met last week to discuss the budget, but they’ve yet to agree on a basic framework and finance ministry officials say almost no substantive discussions have taken place so far.

UN forced to halt Gaza aid work, risking delay to polio campaign

The United Nations has stopped humanitarian operations in Gaza after an Israeli evacuation order, according to a senior UN official, the most serious obstacle to aid deliveries amid a deepening crisis that’s seen the area’s first case of polio in 25 years.

Work was halted after Israeli officials issued evacuation orders on Sunday night for Deir al-Balah, the region in central Gaza where the organisation coordinates most of its operations, said the official, who asked not to be identified discussing the matter.

Though the UN hasn’t given official orders to stop, in practice it’s unable to conduct any aid deliveries, the person said, adding the world body was in touch with Israeli officials about resuming operations as soon as possible. The UN’s main unit in Gaza, UNWRA, is still providing services at its facilities.

The official said that while the UN had been forced to delay or pause deliveries for a few hours in the past, this marked the first time operations had fully come to a stop.

The interruption risks delaying a UN-led vaccination campaign scheduled to begin later this week. The UN intends to distribute some 1.2 million doses of the polio vaccine in Gaza as part of an effort to vaccinate more than 640,000 Palestinian children.

Humanitarian groups have been working to start inoculations after traces of a polio virus variant were found in local water sources last month. A 10-month-old baby was diagnosed with the paralysing disease last week in Gaza, which the World Health Organization said has been polio-free for at least 25 years.

Fires burn on Houthi-hit oil tanker, but no spill yet 

Fires were burning around the oil tanks of a ship that was attacked by Houthi militants in the Red Sea, but there were no signs of a spill so far, the European Union naval force in the region said.

Flames were seen in at least five locations on the oil tanker Sounion after multiple attacks last week, according to Operation Aspides. Images posted on X show flames coming from the main holds of the vessel where oil is stored, as well as around the ship’s bridge. The naval force said the ship was an “imminent environmental hazard”.

The agency had warned of an ecological disaster earlier due to the large volume of oil on board. There was a threat of the ship spilling “a million barrels of oil into the Red Sea, an amount four times the size of the Exxon Valdez disaster,” the US State Department said in a separate statement over the weekend.

The Sounion was hit with missiles on 21 August after rounding the Yemeni coast to enter the Red Sea. The tanker, which can carry about one million barrels of crude, had called at Iraq’s Basrah oil terminal. As of Monday, the vessel remained at anchor in international waters, according to Operation Aspides.

Yemen’s Houthi militants have plagued the areas in and around the Red Sea with missile and drone attacks since November, forcing a vast majority of vessels to instead take the longer route around Africa. The rebels said they would keep attacking merchant ships to protest against Israel’s war with Hamas.

The Sounion’s crew were evacuated on 22 August and a French naval destroyer involved in the operation destroyed several missiles launched from Houthi-controlled territories. After the evacuation, the Sounion was attacked again on 23 August, causing the fires that are now burning on the vessel. DM

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